Distressed Volatility has been alerting you about the municipal crisis since day one (see labels Municipal Bonds or Municipalities for recent posts). Here's an in depth post on the muni crisis from February 25 titled Municipal Crisis Is Spreading, Updates on Distressed Municipalities. Another memorable moment in history was six days ago, when the CDS (credit default swap) probability of default percentage on the State of Illinois was one notch above Iraq! They switched spots since then though. The point is, eroding tax receipts, debt interest payments and lack of funds are squeezing municipalities, some more than others. Illinois had $4.7 billion in unpaid bills and transfers at the end of last quarter (FY 2010).
MCDX, an index referencing municipal bond credit default swaps, or insurance on muni debt, is up 100%+ since November of 2009. MCDX.NA 14 was not available at that time. On 11/9/2009 I put up Markit MCDX.NA End-of-Day Spreads in a Disqus comment.
Markit MCDX.NA End-of-Day Spreads (Nov 06, 2009)
Index Price Spread
MCDX.NA 13 V1 3Y 99.87 104.50
MCDX.NA 13 V1 5Y 99.46 112.67
MCDX.NA 13 V1 10Y 99.02 114.33
MCDX.NA 12 V1 3Y 99.89 104.50
MCDX.NA 12 V1 5Y 99.50 112.67
MCDX.NA 12 V1 10Y 99.05 114.33
MCDX.NA 11 V1 3Y 99.61 104.50
MCDX.NA 11 V1 5Y 99.18 112.67
MCDX.NA 11 V1 10Y 98.76 114.33
Now here are end-of-day MCDX spreads on July 12, 2010 (see MCDX at Markit.com).
This graphic at Markit.com gives key information on the credit default swap index including reference entities, reference obligations, credit ratings etc.
So will economic activity spike to realign tax revenues, operating expenses and interest payments? Or will the Federal Government have to backstop muni debt? CheekyBastard over at Zero Hedge had a interesting blog post on MCDX in June. DV Credit Opportunities Fund is up 100%+ in 9 months. Hopefully spreads tighten so sewer and wastewater revenue bonds don't default.