Carnage in the Fixed Income Markets

Earlier this morning I received some emails from my friends and colleagues on Wall Street. (As you may recall, I used to work at Morgan Stanley and Goldman Sachs.)

To quote a good friend of mine: "This was the single worst week in the credit/fixed income markets ever. Including LTC (Long Term Capital) and Enron, for you history buffs. The media missed it!" In fairness to him and us, we're talking about it, but not enough! In large measure, I think it's because many of us don't understand it. Let me give you some stats that, hopefully, will demonstrate how bloody it is and why it is such an issue.

Yields on tax-free bonds surged yesterday for the 12th straight session. Why do we care? Because states, cities, and other municipalities like California have to sell bonds to fund their operations. Next week, California plans to raise $1.75 billion for infrastructure costs. If they cannot raise it or yields continue to climb as they have been -- and are expected to -- that suggests that investors are not interested or spooked by the quality of the investments and the insurance backing them. Remember MBIA and Ambac?

Check this out! According to the newspaper Bond Buyer, yields on an index of 40 long-term issues nationwide jumped to 5.33% yesterday, the highest level since 2002 and up from a 4.74% yield five weeks ago. Even Bloomberg's index of 20-year California general obligations bonds yielded 5.16% from 4.63% five weeks ago.

Those bond insurers guarantee about half of the muni market nationwide. The question now is whether the moves to shore up MBIA and Ambac are enough to secure the market. The lack of demand in these markets is suggesting investors do not have confidence!

Frankly, I don't know what to think. I am no economist, but if municipalities have to pay higher and higher yields to get the funding they need, will that cost us -- the taxpayers? Just as importantly, will it cost us jobs? A lack of increased business investment (particularly from overseas investors if we cannot upgrade our infrastructure at the rate that other countries are) has to be bad news, if it in fact comes to that.