SAC publishes periodic research on a whole range of topics related to the bond market.
July 2011
DEBT CEILING PERSPECTIVE
Similar to the millennium computer controversy (Y2K) in 1999, the debt-ceiling debate has dominated headlines over the last two months. This media feeding frenzy, built mostly on hot air, has fostered misconceptions and has not focused on some significant realities. At the outset, the credit rating agencies (CRA's) have a record of poor accuracy on toxic debt (Enron, Fannie Mae, Freddie Mac), mortgage-backeds, structured notes, and sovereign debt of insolvent foreign economies. Why the CRA's have come to Jesus on the U.S. ratings is a function of who makes money from the issuance of government debt; which institutions are the biggest users of CRA services; and how shadow banking completely depends on collateral underlying their transactions. Read Full Version >
April 2011
MUNICIPAL MARKET UPDATE: An Evolving "New Normal" for Municipals
Since the beginning of the financial crisis in 2008/2009 much has happened to the dynamics of the municipal bond market, both internally and externally. While the initial reaction was an expectation that the market would eventually revert to something like its previous condition after the crisis passed, the reality is that the marketplace has substantially changed and will remain so for the foreseeable future. In the last six months the outline of the new market equilibrium has come into view and begun to be accepted by market participants. All of these changes only serve to reinforce our ongoing strategy of separate account management, using municipal bonds issued by high quality, stand-alone credits with vital-service or tax based revenue streams supporting the debt service. Read Full Version >
January 2011
MUNICIPAL MARKET UPDATE: "Headline Risk" Is Not Default Risk!
Back in November 2009, we commented on negative and exaggerated media reports regarding municipal credit issues (Municipal Market Update - Credit Challenges, Not Credit Collapse). Subsequently, municipal bonds rallied strongly into the first three quarters of 2010, and then, in the last quarter, sold off primarily due to the structural factors that we enumerated in our last Municipal Market Update (A Muni "Flash Crash"). During this whole time the negative reporting has continued, with the added participation of outside financial pundits such as Warren Buffet and Meredith Whitney, whose expertise lies far outside of public finance. While we do not think that the already well-known credit challenges of municipal issuers were the cause of the recent sell-off, their repetition in the "echo chamber" of the media may have gained some traction with retail investors, resulting in continued negative cash flows out of tax-exempt mutual funds and prolonging the downturn. In this report, we will review the structural strengths of traditional municipal credits and why the worst-case, "doomsday" scenarios being thrown about are exaggerated and sensationalist, the very definition of "Headline Risk". Read Full Version >
