Trouble In (Chicago) River City! No Buyers for Chicago School Bonds Causes Rates to Hit 9%

The Illinois fiscal crisis continues. But it goes beyond the State. The Chicago Board of Education is also having trouble raising funding. Their municipal bond rate has soared to a whopping 9%! And that is for a variable rate bond that matures in 2032.

(Bloomberg) — Chicago’s school system is paying bond-market penalties similar to those seen during last decade’s credit crisis.

The junk-rated district, reeling from escalating pension costs and fallout from the Illinois budget gridlock, has been stuck paying punitive interest rates on $167.5 million of adjustable-rate bonds after PNC Capital Markets failed in March to resell the securities once previous owners sold them. The rate on the bonds, which are supposed to stay extremely low because investors can resell them to banks periodically, jumped to a maximum 9 percent on March 1 from 4.64 percent the week before and has stayed there ever since, according to data compiled by Bloomberg. 

The spiraling interest bills are reminiscent of the chaos that erupted in the wake of the Lehman Brothers Holdings Inc.’s bankruptcy in 2008, when state and local governments were stung by soaring costs after investors sold the variable-rate securities en masse just as banks were scrambling to raise cash. In Chicago’s case, though, it reflects how skittish investors have become about holding the debt of the cash-strapped school system.

“Chicago Public Schools has been unable to create a fiscally responsible budget and it relies on outside sources that, as we see, sometimes comes through and sometimes don’t,” said Matt Dalton, chief executive officer of Rye Brook, New York-based Belle Haven Investments, which manages $6 billion of municipal bonds, including about $3 million of insured Chicago school debt. “That’s unsettling investors.”

The school district agreed this week to pay a rate of 6.39 percent — subject to adjustment — for a short-term $275 million loan from JPMorgan Chase & Co. to help make a pension payment and cover the cost of staying open through the end of the school year. The schools didn’t receive $215 million more in state aid to make the retirement-fund contribution after a measure was vetoed by Governor Bruce Rauner. Illinois has failed to pass a budget for more than two years as the Republican governor and Democrat-led legislature battle over how to close the state’s chronic budget deficits.

A 9% coupon rate on a floating rate, 15 year muni?

Of course, with Human Resource Expenses exploding in The Windy City for their Board of Education, it is not surprising that they are in deep trouble.

Trouble, oh we got trouble,
Right here in (Chicago) River City!
With a capital “T”
That rhymes with “B”
And that stands for (MUNI)  BONDS.

Maybe Chicago Public Schools need a school band with Mayor Rahn Emanuel as the band leader?

 

 

Household Debt Growth YoY Now Equals Federal Public Debt Growth (Thanks To Debt Ceiling On Feds)

Yes, the US public debt is temporarily frozen at the statutory debt limit (with the exception of fiscal shenanigan with public debt held by investors versus intragovernmental lending).  You can see the rapid expansion of household debt between 2000 and 2007 compared with after 2007.

But it was the Federal government that greatly expanded debt after 2007, not households.

The Year-over-year increase in Public debt can be seen spiking in 2009 then slowing while consumer debt bottomed out in 2009 but has been growing ever since such the the YoY growth rate in Public debt and consumer debt are about the same (3% YoY for Public debt and 3.44% YoY for household debt).

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Despite the staggering monetary stimulus from The Federal Reserve (created in 1913 by The Federal Reserve Act and signed into law by President Woodrow Wilson), household debt has bee relatively slow to grow compared to previous decades while Public debt has benefitted by The Fed’s monetary rate repression.

And the monetary effect seems to have stalled for commercial and industrial lending (2.6% YoY) and real estate lending (4.64% YoY).

Janet Yellen looks like a Keynesian Krusader in this photo.

 

2001 A Space Oddity: Inventory of Existing Homes For Sales Only at 2001 Levels

According to the National Association of Realtors (NRA), US existing home sales rose 1.1% from April to May to 5.62 million units SAAR.

Existing home sales rose the most in The South and least in the Northeast.

Inventory of existing homes for sale? It is only at 2001 levels.

Yes, it is a 2001 space oddity that inventories are so low.

Mortgage Applications Increase in Latest Weekly Survey Despite Relatively Tight Credit

According to the Mortgage Bankers Association, mortgage applications increased 0.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 16, 2017.

The Refinance Index increased 2 percent from the previous week to its highest level since November 2016. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 2 percent compared with the previous week and was 9 percent higher than the same week one year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) decreased to 4.13 percent from 4.14 percent, with points increasing to 0.35 from 0.34 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Unadjusted mortgage purchase applications continued their upward trend since 2014.

Mortgage purchase applications continue to be relatively lower (by bubble standards) thanks to the curtailment of low credit score lending.

With mortgage rates generally trending upwards, we shall see how this plays out.

US Treasury Secretary Mnuchin Still Interested In Ultralong (High Duration) Sovereign Debt As Argentina Sees strong demand for surprise 100-year bond

US Treasury Secretary Steve “The Munchkin” Mnuchin said on Bloomberg News today that Treasury is still considering issuing ultra-long sovereign debt. This comes on the news that Argentina is issuing a 100 year sovereign bond that is in hot demand.

Reuters — Argentina sold $2.75 billion of a hotly demanded 100-year bond in U.S. dollars on Monday, just over a year after emerging from its latest default, according to the government.

The South American country received $9.75 billion in orders for the bond, as investors eyed a yield of 7.9 percent in an otherwise low yielding fixed income market where pension funds need to lock in long-term returns.

Thanks to a stronger-than-expected peso currency, the government has increased its overall 2017 foreign currency bond issuance target to $12.75 billion from its previous plan of issuing $10 billion in international bonds, Finance Minister Luis Caputo told reporters in Buenos Aires.

Argentina is going to the international capital markets to help finance a fiscal deficit of 4.2 percent of gross domestic product this year. Caputo said Argentina has $2.6 billion in bonds left to be issued this year. The new paper could be denominated in euros, yen or Swiss francs.

The new bond had a coupon of 7.125 percent, the finance ministry said in a statement that hailed success of the sale as evidence that Argentina had regained “credibility and confidence.”

Still, the move came as a surprise given Argentina only last year ended a decade-long dispute with creditors over its 2002 default and residents tend to frown upon accumulating debt in dollars.

Mnuchin is considering joining the “High duration” crowd of nations issuing sovereign debt with maturities longer than 30 years. Once Argentina’s 100 year bond starts to trade, their sovereign yield curve will be the longest after Austria’s 70 year sovereign bond.

Argentina is now a member of “The High Duration” Club. Based on preliminary estimates, the modified duration (as measure of interest rate risk) is 14.

Here is Fed Reserve Chair Janet Yellen discussing ultra long bond issuance with members of Mnuchin’s Treasury team.

 

US Q2 GDP Forecasts Fall To 1.86% (NY Fed Nowcast) and 2.9% (Atlanta Fed GDPNow)

Today is a day of little economic news (other than serial bond defaulter Argentina seeing strong demand for its new 100 year sovereign bond issue). So I decided to review the state of the US economy in terms of competing real-time Q2 forecasts from the New York Fed (Nowcast) and Hot ‘Lanta Fed (GDPNow).

Despite declining GDP growth forecasts, The Fed has raised its target rate TWICE in 2017 after another rate increase in December 2016. As of today, the NY Fed Nowcast is tracking Q2 GDP growth at 1.86% while the Atlanta Fed GDPNow is tracking Q2 GDP growth at 2.9%.

To be sure, the Atlanta Fed GDPNow forecast is more volatile than the NY Fed Nowcast forecast.

At least the PCE core price index YoY is relatively constant in that it only exceeded The Fed’s inflation benchmark of 2% only briefly during the first half of 2012. Other than that, its has been Dudsville.

US Treasury 30Y-5Y Slope Falls To Under 100 (Lowest Since Dec 2007)

The US Treasury yield curve (30Y-5Y) slope has flattened to the lowest level since December 2007, before The Great Recession.

The US Treasury 10Y-2Y curve slope (orange line) is near the lowest level since December 2007.

It looks like The Fed’s massive stimulus has finally worn off for the Treasury curve.

Fed Vice Chair Stanley Fischer spoke this morning.