Another reminder that munis are not bulletproof

The Markit MCDX index - an indicator of the perceived risk of investing in the municipal bond market - on Wednesday traded wider than a similar index of US investment grade bonds.

This is the first time that buying protection on US municipal debt via the MCDX index, which was launched in May, cost more than buying similar protection for investment grade US corporate bonds, Markit said.
Per Gavan Nolan, Markit’s credit analyst:

The current widening of Markit MCDX spreads reflects the perceived increase in municipal credit risk. A confluence of events - an economy in recession, decreasing home values and increasing unemployment - has combined to reduce municipalities’ sources of income. Several municipalities have announced recently that they are experiencing financial difficulties. The likes of Michigan and New York City, exposed to the struggling auto and financial sectors respectively, demonstrate the importance of credit risk in the municipal market.

Spreads on the MCDX , which references the CDS on 50 municipal bonds, were quoted around 330bp on Wednesday afternoon, Markit said. The CDX IG, which consists of contracts on 125 North American investment grade bond issuers, was trading around 269 bps.