Shorting municipal debt in the USA?

[DTEJD1997]

Hey all:

 

There is a problem in the USA.

 

Lots of small cities will eventually have to go bankrupt.

 

This is largely due to their pension & post retirement obligations.

 

What is not well known OR appreciated is the scale of this problem and some of the cities that are affected.  Here in the Detroit area, there are some VERY affluent suburbs that are in serious trouble.

 

There are other cities that are more working class that have problems with pensions AND their property tax base.

 

SO I wondering if there is any possible way to short their municipal debt or is there credit default swaps?

 

Perhaps these municipalities are simply too small to get short or swaps on...but I don't think most investors have a handle on how bad things truly are.

[gg]

Have you found any specific munis that are particularly attractive from your perspective?

 

If you can't short them, there are some insurance companies that insure these sort of debt securities against default. Could be a play with that of enough bad minis are concentrated in an entity like that.

[DTEJD1997]

At this point in time, I have not identified any specific securities.

 

As everyone knows, Detroit went bankrupt a few years ago.

 

There are a BUNCH of smaller suburbs that are in INCREDIBLY bad financial shape.  The one I live in is one of them.

 

I have spent about an hour speaking with the city manager about the pension/retirement benefit problems in our city.  He pointed out that while the city is in bad condition, it is not the only one.  He also pointed out that due to accounting regulations, there are MANY cities that are WORSE off than my city, AND are not seen as being in bad shape financially.  He gave me a few examples, and I was shocked.  Some of them are VERY well to do areas and I never would have guessed that they have problems.

 

Accounting regulations are not properly taking into account the problems with pensions/healthcare obligations.

 

So I wonder if there is an inefficient market in municipal debt? 

 

In the build up to the GFC, there were reports of investors being able to get credit default swaps on books of mortgages for mere basis points.  Is there someway to do it with smaller municipal debt?

 

 

I am definitely going to look into this in the upcoming year.

[TwoCitiesCapital]

At this point in time, I have not identified any specific securities.

 

As everyone knows, Detroit went bankrupt a few years ago.

 

There are a BUNCH of smaller suburbs that are in INCREDIBLY bad financial shape.  The one I live in is one of them.

 

I have spent about an hour speaking with the city manager about the pension/retirement benefit problems in our city.  He pointed out that while the city is in bad condition, it is not the only one.  He also pointed out that due to accounting regulations, there are MANY cities that are WORSE off than my city, AND are not seen as being in bad shape financially.  He gave me a few examples, and I was shocked.  Some of them are VERY well to do areas and I never would have guessed that they have problems.

 

Accounting regulations are not properly taking into account the problems with pensions/healthcare obligations.

 

So I wonder if there is an inefficient market in municipal debt? 

 

In the build up to the GFC, there were reports of investors being able to get credit default swaps on books of mortgages for mere basis points.  Is there someway to do it with smaller municipal debt?

 

 

I am definitely going to look into this in the upcoming year.

 

As far as I know, there are not a lot of options for this just given that defaults in general have been so low for municipals. If you're truly concerned about it, selling the property you have in the area and renting might be the best way to capitalize given that property values will likely fall, but property tax revenues will likely have to go up to make up some of the shortfall.

[ritrading]

You cant really short bonds in a sense like stocks. If you think about it, every issuer is short their own bonds. Shorting a bond means you are borrowing money. And borrowing money involves a credit rating. The best you can do is something like an OTC contract for difference, with someone who wants to take the other side. You’ll have to find someone, do a large enough amount to make it worth their time, and take on counterparty risk.