Greece and California March 31, 2010, Peter Demirali, Managing Director and Portfolio Manager
The last several weeks have been filled with worried talk of sovereign debt defaults. Newspaper headlines as well as radio and television programs have broadcast that many nations have overextended themselves on debt and are now less able to access the capital markets at favorable rates or terms. It is apparent the markets are now demanding greater fiscal discipline on the part of national governments, and investors are less willing to finance reckless behavior. In fact, we believe investors are becoming much more sophisticated and discriminating when it comes to purchasing government debt.
Yesterday Greece issued 5 billion euros of debt at a yield of 6%. Investors were rather cool to the deal, as there has been very little substantive progress to resolve Greece’s debt and spending problems. Yields widened out significantly in secondary trading today as buyers went on strike. The seven-year maturity moved more than a quarter of a percent higher in yield (lower in price) in one trading day. That is a significant loss in value and serves to put buyers and sellers of Greek debt on notice. More importantly, Greece needs to raise an additional 30 billion euros to roll over maturing debt. This task has now become that much harder and costlier.
On the flip side, the State of California came to market last week, raising more than $3.5 billion in the bond market rather easily. Over the course of the last two months, spreads on California’s general-obligation debt narrowed by more than 50 basis points, as investors came to understand California is not even close to defaulting on its debt. California’s revenues dwarf its interest expenses and principal repayment. While Greece and California have roughly the same credit ratings, clearly investors can tell the difference. Most telling from this very large bond underwriting was the fact that more than thirty percent of the issue was bought by foreign investors! Over $1 billion in California debt went overseas. The days of municipal debt being sold only to wealthy individuals is now over.
Going forward, we expect to see ever greater numbers of foreign investors diversify their holdings and increase their allocations to US municipal debt at all levels. As troubles continue to brew in Europe on the sovereign debt issue, demand should increase for these large underwritings of taxable municipal bonds.
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