Recent media buzz surrounds comments made in a December 19, 2010 interview on "60 Minutes with Meredith Whitney, banking analyst and frequent contributor to CNBC, Fox Business, and Bloomberg News programs. On the topic of municipal bonds, Whitney said, "You could see 50 sizeable defaults, fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults." (see interview from "60 Minutes": http://www.youtube.com/watch?v=CP4QHNJ7EWo&feature=related

However, May 23 on Bloomberg Radio hosted by Tom Keene, Whitney is quoted as saying, "I never said that there would be hundreds of billions of defaults. It was never a precise estimate over a specific period of time." As for the timing of the predicted defaults, on the "60 Minutes" segment, she said, "It'll be something to worry about within the next 12 months." Yet in her Bloomberg interview she said, "In the cycle of this municipal downturn, I stand by it. But we never had a specific estimate for that. That's not the nature of our research."

According to Joe Mysak, editor of Bloomberg Brief's daily Municipal Market, "What so astonished municipal market investors about the Whitney call was its outlandishness—"hundreds of billions" in a market that hasn't seen a year in which defaults reached even $10 billion…Whitney's outlook, then and now, sounds absurd."

Confusing and contradictory comments by well-known experts like Whitney usually send a shiver—sometimes something more disturbing—through investors, especially when the quotes are so visible, yet much of the rebuttal appears in industry publications. We thought you would be interested in Moneta's view of municipal bonds in light of this latest media upheaval.

Fixed Income Director Rich McDonald (who traded more than $1 billion in bonds for Moneta clients in his first year on board) says that even taking into consideration the low side of Whitney's prediction—assuming that $100 billion would default—that would mean that we should be seeing about $2 billion in defaults per week. However, according to a recent Bloomberg article, there have been only 14 municipal bond defaults so far in 2011, totaling only $605 million.  In fact, defaults are down in the first quarter of 2011 as compared to the first quarter of 2010.  Rich noted that it seems very unlikely defaults in the municipal market could come close to what Ms. Whitney predicted. 

State and local governments are making the tough choices to cut spending, reduce payrolls and increase taxes.  Two states, Illinois and Connecticut, recently increased taxes significantly.  Both states saw yields fall on existing bonds after announcing the tax increases, indicating the market perceived less risk associated with their debt.

We continue to adhere to a policy of buying only investment grade rated bonds for our clients. As of the date of this message, we are not aware of any issuer of bonds purchased for our clients that are at risk. We continue to carefully monitor our selections and, based on our research, disciplined approach and oversight, we remain comfortable with the quality of municipal bonds Moneta currently purchases.