Linear Trend Failure of the Day (Musical Tribute)

July 24, 2013
No, Meredith Whitney, Detroit's Bankruptcy Is Not Going To Lead To A Wave Of Municipal Defaults

But we have heard this tale of terror one time too many. Unlike the first time Whitney tried to scare us about munis, the bond market is not having a panic attack today. Nor should it.

The following chart compares the yield of a municipal bond index (bond buyer index, general obligation, 20 years to maturity, mixed quality) to the yield of the 20-year treasury.


Click to enlarge.



If the long-term trend in this chart continues, then municipal bond yields will rise (and will continue to rise) once treasury yields stop falling. How's that for scary? Want scarier? The declining long-term linear trend has actually failed. The Great Recession caused it to go from bad to worse.

I'm therefore willing to offer an opinion.

Yes, Meredith Whitney, over the long-term Detroit's bankruptcy could very well lead to a wave of municipal defaults. For what it is worth, I'm not a big fan of investing in declining linear trends breaking to the downside. I have had no desire to invest in municipal bonds at any point in my life. I feel no great need to start now.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart