The evolution of treasury and muni bond yields

Aca

What’s depicted below is the 10 year US Treasury versus the 10 year muni bond index. As you can see, the yields have an extremely high correlation – muni bonds practically ARE treasury bonds. So why are yields surging in Italy, Spain, Greece and Portugal, but they’re remaining so tame in the muni market? Simple – the US government, which can always procure funds via taxes and bond sales therefore making solvency a non-issue, provides substantial federal aid to the states every year.  While this doesn’t eliminate the solvency issue at the state level it certainly helps reduce it substantially. Europe has no such mechanism in place so what you basically have is a bunch of US states in an environment where they’re left to fend for themselves.  They can’t print their own currency, they can’t devalue their own currency and they can certainly run out of Euros.  The result is bond investors who are terrified about default and end up selling bonds which only exacerbates the budgeting process.