Municipal Bond Turmoil: Some Positive Benefits

The municipal bond markets cratered last week. Munis were actually yielding as much as U.S. treasuries. But the interest paid on munis is tax free to the bond holder. So the de facto yield of some munis on Friday was app.8% when the taxes were considered. This historic inversion of the treasury/muni relationship was an example of further fallout from the margin calls generated by "marking to market" security postions that is demanded by standard acounting practices. Probably the accounting rules will have to be modified somewhat. Maybe a longer period of time and an average price will have to be used before a margin call is generated.

But in the meantime cities,counties and states are having a rough time raising affordable money for their projects. For example yesterday the Houston Independent School District had to withdraw its planned $ 385 million bond issue because of the extreme rise in cost. Maybe that's a good thing. There has long been the glaring fact that there is no meaningful connection between money spent and a quality education for youth. So now market forces in the bond maket will force local and state officials to discriminate more on how to use their limited options on what projects to pursue and fund. Do we want water and sewage infrasructure upgrades or more money thrown down the rathole of school bureaucracies?