Real trouble

25 January 2011 By Agnes Crane

Huge state shortfalls make for easy headlines on the $3 trln U.S. municipal bond market. But old woes, such as abysmal disclosure, and more recent wounds like damage to the traditional insurance safety net should worry the sector’s taxsensitive investors more.

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In the past 10 weeks, U.S. investors have withdrawn $20 billion from municipal bond funds, according to Lipper, a Thomson Reuters company that tracks mutual bond fund flows.

About $3 trillion of muni bonds are outstanding, following issuance of $431 billion in 2010 and $407 billion in 2009, according to Thomson Reuters. Insured debt accounted for around half of municipal bond issuance before bond insurers lost their AAA ratings in 2008. In 2010, less than 10 percent of new muni bond deals carried insurance, according to Municipal Market Advisors.

Unlike U.S. companies, state and municipal bond issuers have no obligation to register their securities with U.S. regulators and file financial reports. Instead, underwriters provide investors with some information when marketing bond deals, but disclosure can be minimal, especially for issues that are not rated. Rating firms like Moody's and Standard & Poor's tend to require more information.

Unrated debt accounted for roughly 5 percent, or $20 billion, of total municipal debt sales in 2010, according to data from Thomson Reuters. In 2006, 10 percent of issuance, or $37 billion, was not rated.

Of the 257 municipal bonds currently in default, at least 219 were unrated, according to Municipal Market Advisors. The par amount of muni bonds in default is $8.2 billion.

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