Mortgage Delinquencies; If Munis are Cheap, Why Does Everyone Hate the Market?

Categories: Commentary |

March 16, 2015

This week, we examine the most recent Mortgage Delinquency Rate, revisit a previous analysis of municipal bond ratios to Treasuries, and evaluate the relationship between a market sentiment indicator and interest rate changes.

Residential Mortgage Delinquency Rates Illustrate Dispersion

The Mortgage Delinquency Rate is one of the housing market indicators we track to monitor the health of regional and local economies.  Last week, we updated our datasets to reflect Mortgage Delinquency Rates from January 2015.  The results highlight a wide dispersion across the nation.

The United States average rate is 5.6%. North Dakota has the lowest rate by far (1.8%); Mississippi has the highest (12.5%).

The Mortgage Delinquency Rate for Connecticut (6.30%), whose housing market we highlighted in last week’s Commentary, is in the bottom third of States for Mortgage Delinquency Rate.  As recently as September 2012, Connecticut’s Mortgage Delinquency Rate was slightly better than the national average. This data corroborates the conclusion we drew from the Housing Price Index data that the Connecticut housing market is lagging.


The most extreme laggard over the last year has been Maine.  It is the only State whose Mortgage Delinquency Rate actually increased over the last year.

Among the most improved states were Nevada (6.9% à 5.4%), Massachusetts (7.2% à 6.2%), and California (4.4% à 3.6%).

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Looking at the chart below, we see the steady improvement in Nevada and California over multiple years.  While Maine has tracked closely with National averages for most of the period, its Mortgage Delinquency Rate has increased in the last few months.

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If Munis are Cheap, Why Does Everyone Hate the Market?

Over the last several weeks numerous pundits and columns have been pointing out that munis are “cheap”.  “Cheap” usually being jargon for municipal yields being high relative to Treasury yields.  We looked at the issue in our January 20, 2015 Commentary.  Our conclusion then was that because ratios are correlated with the level of interest rates, “cheap” ratios can sometimes send false signals.  We suggested that based on historical relationships since 1990’s, ratios (and municipal interest rates) were actually lower than expected for the level of Treasury rates.

At current rate levels, ratios continue to be lower than predicted by historical patterns since 1990.  Using the Bond Buyer 25-Bond Revenue Index, we find that the actual ratio (160%) is below the predicted (172%).

We were curious what this analysis would show over a shorter time frame.  The chart below compares ratios with the level of rates for the last 3 years.  The correlation stands up even in this shorter time period.  In contrast to the longer-term analysis, using a 3-year window shows ratios to be about where we would expect.

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Municipal Market Data conducts a weekly Market Survey, which polls Traders and Portfolio Managers to determine their bullishness/bearishness regarding the municipal market.

The results this week tended to be very bearish.  To put this week’s sentiment into perspective, we converted the MMD 1-2 month outlook to a -1 to 1 scale (-1 totally bearish, 0 neutral, 1 totally bullish).

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According to the MMD survey, market participants are currently extremely bearish.

This bearishness seems to contrast with the many sources touting the municipal market as “cheap”.

The contrast between the “ratio indicator” and a “market sentiment indicator” lead us to look at the performance of the market sentiment indicator in predicting future interest rate moves.  We looked at the correlation between market sentiment and interest rate movements (both past and future).

Generally the correlations were very weak.  Market sentiment was most highly correlated with interest rate changes in the past week.  Looking one week forward showed the next highest correlation.  Looking four weeks forward was relatively weak.

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The correlation was weakened most dramatically by several periods: the May 2013 Taper Tantrum and the September 2013 relief rally (highlighted in blue in the chart above).

For us, this exercise reinforces our opinion that fundamental credit and structure selection are a better foundation for municipal bond portfolio out-performance than interest rate calls.


Have a great week,

Michael Craft, CFA


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