Debt sold by U.S. states is the safest relative to Treasuries since 2008 as municipal finances recover and President Barack Obama struggles to agree with Republicans on plans to cut the federal budget deficit.
The CHART OF THE DAY shows that the average cost of credit- default swaps on the six most-traded states has fallen by almost 60 percent since the start of the year, while contracts on the nation increased about 20 percent. The average of California, Florida, Illinois, New Jersey, New York and Texas now exceeds the U.S. by 50 basis points, down from 182 basis points five months ago and a record 253 in December 2008.
Investor confidence in the ability of states to repay debt by increasing taxes and slashing spending is spurring the drop in the cost of default insurance. Treasurers are defying a forecast by banking analyst Meredith Whitney who said in December that there could be 50 to 100 “sizable” municipal- bond defaults amounting to “hundreds of billions of dollars.”
“The world is not really ending and the fundamentals are surprising to the upside,” said Mikhail Foux, a strategist at Citigroup Inc. in New York. “It’s hard to say we’re out of the woods, but the data is positive.”
Eight of the world’s nine best performing government swaps so far this year are states, led by California, New York and Illinois, which all fell by more than 56 percent, according to data compiled by Bloomberg. The U.S. is the world’s ninth worst performing government, following Peru, Israel, Saudi Arabia, Egypt, Portugal, Morocco, Greece and Pakistan.
Trading of swaps on the six most active states increased 30 percent to cover a net notional $3.1 billion on May 20, up from $2.4 billion a year ago, according to the Depository Trust & Clearing Corp. Contracts on Treasuries doubled to cover a net notional $4 billion of debt in the same time.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net