America’s muni-bond market takes criticism from several fronts. Because the market’s tax benefits are valuable mostly to high-net-worth individuals, its pool of potential investors is limited. Pension funds, endowments, and other investors already exempt from taxes have little interest in the market. Plus, the market can’t reach global investors because they aren’t interested in saving money on U.S. federal, state, and local taxes, either.
But in this market, these constrictions have become protections. The muni bond market has stayed at least functional during the two-year-old credit crisis because it’s somewhat — not completely — insulated from the strongest global forces of demand destruction.
Yes, it’s more expensive and difficult for states and cities to borrow, and big issuers like New York City can’t float billions of dollars in debt at a time anymore. But for the most part, good credits can borrow.
Contrast our own experience with that of Japan, which depends on international investors and institutional investors to buy its municipal bonds.
Tuesday’s FT noted that Japanese municipal issuers should have one advantage: unlike in America, they are strongly supported by the national government.
But that strength has not been enough to offset declining demand among institutional and global investors.
Last year, “Japan’s local governments … embarked on their first overseas investor relations tour” to try to attract new investors to make up for slumping demand at a time when the need to issue bonds was increasing. But there was little appetite, and “no space for Japanese municipal bonds,” the paper reported.
In America, by contrast, states and cities benefit by having a pool of investors close by who are familiar with the issuers. Yes, demand among high-net-worth Americans has suffered across the board as wealth has destroyed itself.
But there’s a relatively stable demand for tax benefits (especially if taxes are increasing) and a growing demand, relative to everything else, for simple, straightforward debt investments.
In a back-to-basics financial world, it’s good to have a market that never strayed too far from the basics in the first place.
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