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Thomson Reuters

July 12, 2013

WASHINGTON, July 12 (Reuters) – The amount of insured municipal bonds continued to drop in the first half of 2013 even as the field of insurers expanded, according to Thomson Reuters data released on Friday.

Assured Guaranty Municipal Corp. remained the top company by guaranteeing $3.39 billion of debt in the first six months of the year, with newcomer Build America Mutual Assurance Co. taking the second spot at $2.13 billion. Berkshire Hathaway Assurance Corp., a unit of Berkshire Hathaway Inc., came in third, guaranteeing $106.9 million.

The total amount was 26.9 percent less than in the first half of 2012, when Assured was the only company backing debt, the data showed. By comparison, five years ago, in the first half of 2008, nearly $60 billion of new bonds were insured, though that was down from around $130 billion of new sales insured in the first part of 2005.

The total number of insured deals, meanwhile, fell to 561 in the first six months of 2013, 139 fewer than in the same period in 2012.

The bond insurance industry was perhaps the least-likely victim of the housing crisis. Once called “monolines,” the companies had exclusively insured relatively risk-free municipal bonds for years, with their top-shelf credit ratings allowing issuers to pay less in interest. Then the companies expanded into guaranteeing mortgage-backed assets, which proved a fatal mistake for many when those assets crumbled and pulled down their ratings.

Assured was the last company standing. Even though Berkshire Hathaway ventured into guaranteeing debt, it has never matched Assured’s volumes and did not insure any sales between the end of 2009 and the beginning of this year.

Build America started writing business last July. The first mutual insurer for municipal bonds, Build America, which is rated AA by Standard & Poor’s Ratings Services, counts cities, states and other issuers as its members and the National League of Cities as its sponsor.

Also in 2013, the surge in letters of credit ebbed. Some issuers turned to the letters to replace bond insurance, and many had used them to move their debt from auction-rate securities to variable-rate when the market for auction-rates froze in 2009.

In the first half of 2013, there were 78 percent fewer letters of credit issued than in the same period of 2012.

Wells Fargo Bank was the top provider over the opening six months of 2013, with 30 percent market share, while Citibank, which provided the most letters in the same time frame last year, slipped to third. J.P. Morgan Chase was second.

Orrick Herrington & Sutcliffe LLP remained the leader for bond counsel in the first half of 2013, a rank it also held in 2012, while Hawkin Delafield & Wood LLP maintained its second-place position.

Caught off guard, central bankers seeking to alter investors’ view of timing of the end of QE

Jul 1, 2013

Federal Reserve officials intensified efforts to curb a growth-threatening rise in long-term interest rates, seeking to clarify comments by Chairman Ben S. Bernanke that triggered turmoil in global financial markets.

William C. Dudley, president of the Federal Reserve Bank of New York, said last week that any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” He said bond purchases could be prolonged if economic performance fails to meet the Fed’s forecasts.

Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note as high as 2.61 percent last week from as low as 1.63 percent in May. The remarks by Dudley, who also serves as vice chairman of the policy-setting Federal Open Market Committee, along with Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart sought to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.

“Such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants,” said Dudley, 60, a former chief U.S. economist for Goldman Sachs Group Inc.

The Standard & Poor’s 500 Index rose 0.6 percent to 1,613.20 at the close of trading in New York Friday, while the yield on the 10-year Treasury note fell to 2.47 percent from 2.54 percent on June 26.

‘Off Guard’

“It is pretty obvious that the Fed was caught off guard by the market’s reaction given the lengths to which they have gone to reshape market expectations,” Drew Matus, deputy U.S. chief economist at UBS Securities LLC in Stamford, Connecticut, and a former analyst at the New York Fed, said in an e-mail. “The range of both speakers and outlets suggests that these comments are, if not coordinated, then at least part of a collective — likely futile — effort to re-mold the market’s view of the June FOMC press conference.”

Mortgage rates for 30-year loans surged to the highest level in almost two years, increasing borrowing costs at a time when the housing market is strengthening. The average rate for a 30-year fixed mortgage rose to 4.46 percent from 3.93 percent, the biggest one-week increase since 1987, McLean, Virginia-based Freddie Mac said in a statement. The rate was the highest since July 2011 and above 4 percent for the first time since March 2012.

Consumer Spending

Consumer spending in the U.S. rebounded in May following the largest drop in more than three years, a Commerce Department report showed, a sign the economy can weather a second-quarter slowdown. Other reports showed the housing recovery is gaining momentum and consumers are becoming more confident.

Bernanke, at a June 19 press conference following a meeting of the FOMC, outlined a plan for the reduction in the bond purchases that have helped spur growth and fuel a stock market rally. He said the Fed could start curtailing the current $85 billion pace later this year and end them around mid-2014, assuming the economy meets the Fed’s forecasts.

Lockhart, using a smoking metaphor, said the investors had misinterpreted the Chairman’s remarks. “It seems to me the Chairman said we’ll use the patch, and use it flexibly, and some in the markets reacted as if he said ‘cold turkey,” Lockhart said in a speech to the Kiwanis Club of Marietta in Georgia.

Powell said any decision to reduce purchases would depend on economic data, and that there’s no set timetable.

Data’s Importance

“I want to emphasize the importance of data over date,” Powell said at the Bipartisan Policy Center in Washington. “In all likelihood, the current” large-scale asset purchases “will continue for some time.”

The officials spoke a day after a Commerce Department report showed first-quarter growth in the U.S. was less than forecast as a payroll tax increase reduced consumer spending.

“I continue to see the economy as being in a tug-of-war between fiscal drag and underlying fundamental improvement, with a great deal of uncertainty over which force will prevail in the near-term,” Dudley said.

A report this week from the Labor Department may show that the unemployment rate fell to 7.5 percent in June month from 7.6 percent, according to the median forecast in a Bloomberg survey of economists. Employers probably added 165,000 workers to payrolls, down from 175,000 the prior month. The jobless rate peaked at 10 percent in October 2009.

Labor Market

“If labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook — and this is what has happened in recent years — I would expect that the asset purchases would continue at a higher pace for longer,” Dudley said.

Much of the decline in the jobless rate, Dudley said, is a result of workers leaving the labor force. “Job loss rates have fallen, but hiring rates remain depressed at low levels,” he said. “The labor market still cannot be regarded as healthy.”

The FOMC has said it will keep its benchmark rate close to zero as long as unemployment exceeds 6.5 percent and the outlook for inflation is no more than 2.5 percent.

“Not only will it likely take considerable time to reach the FOMC’s 6.5 percent unemployment rate threshold, but also the FOMC could wait considerably longer before raising short-term rates,” Dudley said. “The fact that inflation is coming in well below the FOMC’s 2 percent objective is relevant here. Most FOMC participants currently do not expect short-term rates to begin to rise until 2015.”

The strategy Bernanke laid out for tapering bond purchases was predicated on the economy growing in line with the FOMC’s forecasts. Central bankers expect growth of 2.3 percent to 2.6 percent this year, according to projections released last week. The economy grew at a 1.8 percent rate from January through March, down from a prior reading of 2.4 percent.

For the Fed’s outlook to be realized, gross domestic product would have to expand at about a 3.3 percent average annual rate in the last six months of 2013, according to calculations by economists at BNP Paribas SA in New York.

Bloomberg News