Did the Fed just torpedo the muni bond market?
Maybe so. June looks like it will be one of the worst months for the municipal bond market in years. To put it in perspective, see what's happening in Illinois: The recent interest rate spike will cost the state $130 million over the next 25 years -- and that's for just one new borrowing. On top of that, many cities and states, including Philadelphia and Georgia, have delayed sales of new bonds because of the deteriorating muni market, The New York Times reports.
So the pain will be felt across the U.S. -- in states that have navigated the choppy waters of the recession, even prospered (see Texas and North Dakota) and in states like Illinois and New Jersey, that are already in dire financial straits.
It's really a crisis that could effect so-called "red" and "blue" states equally. And that brings us to analyst Meredith Whitney, who has been warning about municipal defaults for years but not necessarily for the reasons outlined above.
In her new book "Fate of the States: The New Geography of American Prosperity," Whitney argues there's a central corridor in the U.S. that shines with economic prosperity. That corridor includes Texas, Oklahoma, Utah, Colorado, North Dakota and Montana; according to Whitney, power, people and money are beginning to flow to theses states, a shift she insists will keep gaining momentum.
When Whitney was here earlier this month, The Daily Ticker's Aaron Task asked her: It seems like this is a red-state governor vs. blue-state governor setup... is this political in your mind?
Here's her answer: "It just so happens that... if you layer on a 'right to work' state map over a red and blue state map it's exactly the 'right to work' states are the red states... they also happen to be largely agrarian commodities-based states as well, which gets back to the whole issue of they have very naturally culturally conservative governments."
Whitney goes on to say, "I don't view it to be partisan at all... it's just how the math works out. It's easier to provide great social services and increasing social services and big government if you have an expanding tax coffer, the music ends when that tax coffer dries up."
And when rising interest rates trigger a rout in the muni bond market.
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- Meredith Whitney