White Paper on Municipal Bonds

With the turmoil in the market, the yield on munis, in particular Michigan municipal bonds, has been historically shifted. Munis sell treasuries on a yield basis for a large premium. We assume that this premium is rare and provides many occasions. We observe, in particular:

• In Michigan municipal bonds, there is obvious danger mispricing. With a single large brushstroke the entire market was painted. Michigan is a truly diverse state in economics and geography, as I can testify first hand.


• Scores, while not determinative, are helpful. We analyse the municipalities and their problems carefully.


• Town bond view insurers are in chaos. In fact, many insurers are classified as junk.


• Many investors have raised tax rates and this increases the attractiveness of municipal bonds. The health care bill, which imposes a 3.8 percent unrecovered income tax on dividends, interest and income gains in 2013, is of particular interest. The interest on municipal bonds is also exempt from these taxes, making it easier for high bracket persons to obtain the equivalent tax return.


• The current state of interest rates is peculiar. The yield curve is at a record high, and we see a chance to hedge against inflation while remaining relatively short.


• King’s quality. Not all municipal bonds have a similar risk, but they seem to be priced in this way by the industry.


• Queen of liquidity. Municipalities face sales crashes that are potentially -10-15% on average for 2011 and 2012 and probably much longer. You need money and you’re going to borrow. We assume that BABs are a temporary liquidity solution.


• The market is slightly disrupted and unsuccessful. On many topics, we see fire-sale rates. Furthermore, we see the lack of a major unified market for opportunistic transactions. We buy on the offer for our portfolios (wholesale): the spreads are typically very high.