ebook essays pieces of the puzzle
Friday, August 12th, 2011
the big apple

I hadn’t been to New York City in entirely too long and it was great to get there this week, for interesting work during the day and some fun at night.  Included in the latter:  dinner with a certain reformed broker, an incredible performance by Mark Rylance in Jerusalem, and my first visit to Yankee Stadium (albeit 2.0), witnessing a victory with some pinstriped relatives from North Dakota.  Throw in bumping into some big celebrities and milling around with tourists from around the world and it was that special mix that makes the City what it is.

Oh, yes, and there was a little volatility in the market, purportedly located “in Wall Street,” as Louis Rukeyser used to say, but really somewhere in the ether.

I kept hearing echoes from the 1970s.  Someone borrowed the “Ford to New York:  Drop Dead” syntax and turned it into “S&P to U.S.:  Drop Dead,” Governor Hugh Carey was laid to rest, and you can’t walk through Times Square and think of what it once was — or go to the Bronx and find it not burning — without realizing the changes that have taken place over the last few decades.

The chart above takes a look at some of the funds that hold New York municipal bonds — along with the iShares Barclays 20+ Year Treasury Bond Fund (TLT), which had been marching straight up until yesterday, when it was down over five percent.  Notice how different the reaction of the municipal funds (two open-end and two closed-end, identified below) was in 2008 versus 2011, when the TLT also spiked.

Further weakness in bonds or signs of stress in New York could cause a sizable correction in these funds due to the relative illiquidity of the holdings and the tendency for the discounts on the closed-end funds to gap out at the same time as the net asset value falls.  (Chart:  Bloomberg terminal.  NUN:  Nuveen New York Quality Income Municipal Fund ~ MYN:  BlackRock MuniYield New York Quality Fund ~ RMUNX:  Rochester Fund Municipals ~ FNYTX:  Franklin New York Tax-Free Income Fund.)