How is the Investor Landscape Shifting

The concentration of the retail investor has grown in a market that often struggles with liquidity. How are the various demand components of the market shifting? How will the growth of SMAs and ETFs, as well as the dearth of crossover buyers, affect the public finance industry in 2025? What do investors want and how is the sell-side adapting to provide for it?


Transcription:

Christopher Brigati (00:09):

To the Bond Buyer of course for hosting a great event. Unlike what Greg said earlier, I think we're going to try and bring a little sexy back to Munis, so hopefully pull that off. Unlikely, but we're going to give it a shot. We're here to talk about the buy side perspective of the market. So the panels here are kind of well-versed and I've worked with all them to varying degrees or their groups to varying degrees throughout the years. So I think an understanding of their perspective is going to be really valuable to us and the growth and the change to the market dynamics is very interesting for us to see overall. So can we just go through the panel and just everybody give some thoughts and recap 2024, some takeaways you might've had in general for the muni market, for your businesses, and especially anything that kind of really stuck out as something that might've been a little bit of a shock or a surprise to you.

(00:58):

Start.

James Pruskowski (01:00):

Sure. Good morning Suan. So the surprise events for me for 2024 macro wise was I thought the economy, everyone was calling for a recession and held up quite well, quite resilient, so a lot of that got debunked and rates obviously did what they did in a very volatile year. Inflation continued to be very stubborn. I don't see it coming down anytime soon or at least in a material way, albeit it's trending lower. So that was another big surprise and certainly the Fed and the rates sell off following the cut, so don't fight. The fed mentality got challenged in that regard. In terms of munis, I guess the supply side was the big surprise. I mean it was a record year, but to me it got induced by flip back tenders. It got induced by programs running out on the clean energy side or green initiatives and it was great to see flows coming back frightfully so generational high in yields, soundness of inequality, the exemption, the multiplier on high absolute rates.

(02:15):

It's very good to see the market ignoring ratios as it should and liquidity. Obviously a lot of concerns about the fallout of Citigroup, but it was just another reminder that a lot of that material event, at least from a secondary trading perspective happened in 2018 because the asset class wasn't grandfathered and the insurance companies cut bait and bought corporate bonds. So a lot of the damage has already been done and I'd say the last thing was just the pace of the arms race going on in ai, the amount of algos, the liquidity improvement in SMA activity, the streamlining of business workflows and the multiple good that has on the industry. So,

Alex Petrone (03:00):

Great. I am sorry for the voice. I also have children, which means we also have germs all the time. Luckily I feel better than I sound. I mean I'll echo what James commented on and I think it's really interesting because there's been so much shocking already in 2025 that it's hard to reflect back and think about what was surprising about 2024, but I think many of us came into 2024 expecting that monetary policy would lend to a slowdown and a recession and then you saw this unusual moment in which the Fed raised rates 50 basis points, spoke about strength in the economy and you saw the curve twist steeper. None of us really would've expected that. You also saw a period in which I think we learned that yielder areas of the market because credit was quite resilient, could perform quite well. So when I look at the year, I think a lot about relative performance views.

(03:56):

How did things that we anticipated would play out in fact play out. We anticipated muni credit would be resilient. That in fact happened. We actually took the other side on inflation and we've been of the view for quite some time at Rockefeller that inflation wouldn't be sticky from here and that you would have periods of cyclical bouts of inflation coming from things like the housing market where we know the backstory of undersupply in many regions, whether you think about single family or multifamily, and that's been a multi-decade really event happening that will continue to play through as we look to 2026 as well, we thought that the labor market would prove to be quite resilient because of these long-term secular shifts in demographics and then of course you overlay in different periods of time the immigrant population and what that's meant for labor through various periods.

(04:49):

And so we were of the view that it would be a really challenge battle for the Fed layering. Then further on top that the mechanism of monetary policy is a bit broken today versus where we were 10 or 15 years ago because so many companies and so many households were able to very effectively term out their debt. So we had already been of the view of hire for longer, but it is astonishing to see the growth that persists in the aggregate consumer holding up quite well from here. Where we looked to position coming into the year was thinking through where's best relative value and some of the things that we thought would happen such as housing, the housing sector outperforming on carry and excess yield and spread those things came to fruition. So we'll continue to look for that over the course of 2025 as well.

Christopher Brigati (05:38):

Ed.

Ed Paulinski (05:39):

Yeah, and just to add onto that briefly, I think we were fortunate as a market that most of the surprises were more macro related and the supply that we've talked about a nauseam almost already today. The market has been star for supply for so long that absent a few weeks of somewhat volatility and trying to absorb that supply the market welcomed that. So while it was a surprise, I think it was certainly on the welcome side, but more of the surprise that I think most of us didn't anticipate was more macro related regarding the Fed and the move in higher yields across the curve. But it's really set us up I think, well for 2025 amidst this sort of sea of uncertainty, which I am sure we'll get to.

Alex Petrone (06:36):

And I would add to that though, thinking about the technical on the supply side and the demand side, the technicals, the amount of demand for high-yield muni credit, you never would've walked into 2024 where the narrative really was about slow down and concern about municipal balance sheets anticipating that half of the inflows into funds would've been in the high yield market and we saw issuance pick up so materially in the latter half of the year, a lot of high yield deals getting done fairly easily with weaker covenants and call structures that probably benefit the year a bit more than the investor. So really interesting to see that dynamic play through the year.

Ed Paulinski (07:14):

Great. Well just the last point on that, I think what was a welcome sign, especially from the individual investor standpoint, usually when you see spikes in yields, especially on the treasury side, you start to see that mutual fund outflow cycle people taking money off the table in a fixed income and you actually saw more of the opposite this year, whether it was in high yield investment grade and it speaks to the demand for fixed income, the demand for muni specifically, which again bodes well for where we're going this year.

Christopher Brigati (07:45):

Yeah, I think looking at a macro perspective, back at 2024, the expectation was for growth to be a little bit more muted. Recession talk was a very common theme and none of that played out. The market was extremely resilient. As we know the consumer driven economy of the US, about 70% of the economy is driven by consumer spending and that really kind of played out now. That's obviously introduced other challenges to us and that being said, looking ahead as we go into 2025, what are some of your thoughts for the outlook for the municipal market specifically or the general economy as we move forward into this year? Lots to unpack. We talked about earlier with regard to some of the challenges for Muni specifically, but what expectations do you have and what are you thinking for your portfolio structures?

(08:30):

Go ahead.

Alex Petrone (08:33):

 I would say the best thing to expect is volatility, right? But we've been in this period for quite some time, we remind investors a lot. We've had many years of tremendous rate volatility or spread volatility in certain sectors that come off of a headline related to the banks or to city or what have you. Volatility will persist, it's just going to come from a differing driver today and that's going to be the fiscal policy or concerns around the tax exemption. Our job is to take that volatility, figure out what's noise, figure out what's reality and lean into the opportunities as we see them. I think kind of near term, the last panel talked a lot about federal transfers and crowding out of expenditures regardless of what this administration chooses to do in the next several weeks, months, years. The reality was if the deficit's not addressed in meaningful fashion, the federal deficit, we anticipated that over the secular period there would be crowding out of expenditures, there would be crowding out of FEMA and grants and other things that have become quite important to municipalities.

(09:37):

But with that, I think municipal balance sheets can withstand that. So if we get to a period where that gets pulled forward and more is pushed to the states, then I think the market has to grapple with those big questions of our reax exempts or we taxable investors. But then on top of that, really importantly, how do balance sheets shift from here? Do we get comfortable that municipalities have to map towards weaker credit through time, but I think near term it's really headline risk volatility that drives whether it's rates, whether it's spreads, and then very importantly, where's the risk I need to reduce where the opportunities they should be buying.

Christopher Brigati (10:12):

James, anything?

James Pruskowski (10:13):

Yeah, I mean I published a piece on LinkedIn and my company's website, so hopefully everyone saw that. I mean the baseline kind of narrative that I'm working toward or off of is the policy agenda doesn't work without lower rates with affordability on housing and inflation lower and four 80 to me is on tens was the high for the year. So I think the backdrop for fixed income is a generational opportunity. I wrote about it's inevitable that build America bonds come back, whether they be called that or not as anyone's guess at the expense of the exemption, who knows? But the efficiency to bounce debt off a global world while still maintaining local autonomy makes a lot of sense to me. I wrote about high supply. I guess the more I think about it, I think the risk is much lower supply given the induced flip back tenders and expiration of policy funding and whatnot.

(11:21):

So I called it 525, I think it's maybe 475 or something like that because I think 2024 was jacked up in one way or another. I think there's very, very low odds of the exemption being eliminated. Typical comment from a buy-side perspective, but if tariffs are the precedent for funding, man, the stages being set pretty poorly given the negotiations, why would heck would we rely on foreign funding to fund their needs? So I think it's very low. If the deficit was in a much different surplus position, I think it'd be a lot easier. So the complexity is just, I think there's a lot of hesitation in the market because of it and as Ed pointed out, supply is generating demand and what issuance, I think the market rallies through the seasonal weakness that's ahead. I got a bunch of other things, but I didn't want to take

Ed Paulinski (12:19):

Any more time. We can come back. Yeah, I think a comment was said similar this morning is that I can't remember another year where we've come into the calendar year with so much uncertainty, right? Whether it's macro, geopolitical, muni specific policy and the number of headlines are going to come out every day trying to sift through what matters and what doesn't matter is going to be extremely difficult. Alex mentioned that's just going to lead to volatility. What's I think more important is that you can have a baseline view and try and see through a lot of that noise. I think ours is we're going to end the year fairly where we are today. Rates will be range bound, maybe slightly lower. Credit spread should be contained. Credit fundamentals are generally very strong, but the tail risks are so extreme and so making sure managing portfolios on a day-to-day basis with that baseline view in mind, but also making sure you also add protection where you can because those tail risks are so extreme.

Christopher Brigati (13:31):

Great. I guess when we're looking at, one of the things that I'm thoughtful of is coming out of Washington, as we've discussed a lot of changes, it's happening by tweets on a nightly basis, almost a lot of difficulties in processing some of that information. Is there anything that you might be thinking of for your portfolio approach to be, how do you adjust your patterns and your approaches to getting invested as a result of some of this uncertainty? Any new techniques, any different approaches in terms of attacking the market, going more new issue, less new issue, really kind of being on your front foot, being a bid in the market, anything at all that you might be able to add some value to the crowd for?

Ed Paulinski (14:12):

Yeah, maybe I'll start off quick. I think from a technology front again, and this was mentioned earlier, but making sure that as the market evolves, mark mentioned earlier, electronification is real, it's happening. It's happening some places faster than others, but making sure portfolios can participate from that volatility is extremely important. I think from a portfolio management perspective though again making sure you manage for those tail risks, I don't think you want to take risk off the table necessarily because the baseline view is things should be relatively okay, but making sure whether it's adding liquidity in the front end of portfolios, maybe adding treasury exposure where you can offer some buffer to muni specific volatility. I think just preparing for both muni specific volatility, broader macro volatility, I think will benefit portfolios in the long run.

Alex Petrone (15:11):

For anybody that's like me and was trying to spend less time on social media in 2025, it's so hard when policy announcements are coming via social media. So I feel for all of us, I think the game plan is the same as it's been diversify your portfolios carry some dry powder here. So I agree with ED ensuring that you have some front end liquidity, whether that's via bills or short munis, but it really for us is always about within a given risk budget, how are we best optimizing relative value today? Leaning into sectors that are cheap, leaning into areas of the curve where you anticipate that you can benefit from roll down and carry the driver of returns for muni investors is yield, it will drive total return through many periods. That is the key focus for us and we'll continue to do that. I agree with James and Ed's comments. We are past peak rates. I know this was one of the lightning round questions that Bugatti had for us, but I think 479 was probably the top tick on the 10 year and that's behind us because there's a lot of signals that growth likely slows a bit from here. So for investors you do want to lock in rates from here. For us it's really about diversifying just as we've done in the past.

James Pruskowski (16:28):

Yeah, a lot of mentions of, excuse me, volatility I run on long short hedge fund, so that follows pretty good. I mean the flow trading opportunities it creates presents new opportunities for new entrants. So as Ed mentioned, Alex mentioned timing it and prudently managing tail risk is what's utmost important. I just think the vol has better momentum and a better grasp of sentiment around it, which is really good thing. I spoke at I think another Bond Buyer event in Philly last year, but I was quite surprised we were talking about the media effect on trading and how I guess the majority of people didn't think it was important, but it's actually one of my tactically most important aspects of being aware of. So the news flow and in being able to interpret whether the bark's bigger than the bite and how that translates into performance relative to street inventory is what I focus on near term solvency risk and valuation is obviously a longer term perspective of the things I think about away from that. I mean tax reform, what I interpret that being more targeted. So the things I worry about are the reclassification of private education bonds that rely heavily on healthcare revenue like Emory and a bunch of other universities. Why are they in the education index? So I think about those things and as it relates to diversification, it's obviously very important. I guess the wildfires are another reminder that possibly this could be a good national bid and what that means for the broader market and state in state instead of in-state concentrations.

Ed Paulinski (18:23):

Right. Just one bit to add on because Alex raised a good point. I think when you look at fixed income returns and not just muni returns, carry or yield ends up being your largest driver of total return. And the nice thing coming into this year, just given what we spoke about, but the rise in yields of last year is the starting point of yield just so high this year. Three, three and a half percent, 4% depending on how far you go out in the curve. If the market does sell off for a variety of reasons, the protection against the downside return is so great now than it was a few years ago that that protection gives a lot of investors comfort if that tail risk does emerge.

Christopher Brigati (19:07):

Great with the growth of the SMA, that has been well documented SMA and ETF portfolios in the market kind of taking a very sizable share of the overall buy-side opportunity. We've also had some dropoffs from banks and insurance companies, so maybe there's a void that's been filled and it's a net neutral, but what has changed in the market perspective with regard to your businesses, how you can invest it, how you manage through those multiple SMA portfolios, how are you thoughtful about index eligible bonds and how you approach the market? Anything we can glean in terms of your approaches overall towards getting many portfolios invested in a relatively short order?

Alex Petrone (19:51):

I mean I'll start on the SMA side and Ed alluded to this already, technology is your friend. It's critically important in ensuring that as you're taking on more and more accounts that you're able to manage them in like fashion leaning into your best ideas. I think the biggest shift I've seen, I mean I started on the desk with otti nearly 20 years ago and that was the point in time where what did muni buyers look for? They look for aaa insured buy and hold 30 year bonds, max yield, and it was the most boring market possible. I feel like we've brought sexy back into the market to RG Gotti's point and what investors now look for today is a little bit different. You still have the brokerage accounts, buy and hold 30 or what have you, but you have so many folks that in the last call it 15 plus years have moved into institutionally managed separate accounts and these institutions at times have offered a lot of active strategies where you're optimizing curve and sector and what have you.

(20:54):

And then we also know there's a lot of ladder providers that are out there. I've worked at some of the large ones with certainty and what it's meant is the curve has really shifted more materially on a relative value basis. It's put a lot of buyers in the front end looking for call it 15 years and in you can see points in time where investors are irrationally buying immunity to treasury ratios where you say to yourself, you should be buying taxable, I'm happy to sell to you. What in terms of that shift from banks and insurance companies? I would say no, it hasn't filled the gap because it's also thinking about the spots on the curve that the buyers tend to allocate to. And we know banks and insurance companies tend to allocate 20 to 30 years out to match that liability. And then you layer on top of that, you've seen fund mutual fund outflows, ETFs are taking wallet share there.

(21:49):

I think the muni market took a really long time to catch up on the idea that ETFs are in your most tax efficient format for munis, which up until today I am a little nervous about the tax exemption after the last panel, but that's why we're here. I think that ETFs will continue to take wallet share index eligible will become really important of course for the passive ETFs, but active muni ETFs will continue to take wallet share because if investors have gotten comfortable with the concept, it's easier for a lot of large allocators that run ETF models and want to impact across portfolios to use something that has intraday liquidity. So I think we continue to see that expedite through time.

Ed Paulinski (22:31):

Yeah, the rise of SMAs, the growth of SMAs, it's definitely real and I would say we're probably encountering the third stage of that growth. I think Glenn mentioned earlier conservative estimates about 25% of the market probably closer to 30% without technology you can't run that business. We manage about 120 billion in Muni separately managed accounts and we actually had to build our own technology stack to do it just given the complexity involved in it. I think when you think about that, the rise or the trend in SMA growth, though you certainly had that first spike post 2008 when the model I insurers evaporated, people were concerned about credit. You saw that first handoff there. I think that over the past couple of years though, you're started to get into financial advisors not wanting to do it themselves anymore. So moving out of the brokerage model, but you've also seen end clients want more customization, more transparency and at lower fees and that's where you've sort of seen a huge uptick in supply over the growth in assets over the past couple of years.

(23:44):

I do think, and Alex you alluded to this just a minute ago, I think that sort of where we go from here though, I think clients are starting to break down the silos of their muni exposure and their non muni exposure. So for so long people said, I only want muni tax exempt income and that's all I want. And that's driven ratios to some crazy levels over the years. But I think clients are starting to get more comfortable looking at their fixed income exposure holistically and just saying, buy me whatever you think is best on a relative after tax basis and you do it for me. I don't care if it's tax exempt or taxable. And I think we're at the nascent stage of that part of the SMA growth where it's not just muni specific, it's fixed income and then you decide what asset class I go into.

Christopher Brigati (24:39):

Great.

James Pruskowski (24:41):

I know a lot was said, so I don't want up too much time, but I think the industry has a workflow problem. If you're an issuer, it's from incubating a deal to bringing it to market and file cabinets, electronification of email exchanges and all those sorts of things that reduce fees. I think it has a massive workflow problem on the buy side that creates tremendous opportunity. Hence the arms race in algo from orders from the FA field that go to the PM that go to the trader and say Buy now and the matrices that get created and the need to get invested creates tremendous opportunity. But the point is that I think the SMA world is just advancing the technology aspect of the market. I think the asset class is often misunderstood and overlooked. So part of the challenge is explaining the efficiency of many line items within a portfolio, whereas if you run a taxable account, you could run a hundred line items in any given portfolio and algo has 4,000 line items.

(25:54):

So it's having to explain that is a bit of a challenge, but it's hence the opportunity set because the retail market that we're trading against, that's most apparent in the five to 15 year range or three to 15 year range given the SMA and ETF world. And the last thing would be just the meaning of ETF and SMA growth. It's compressing fees and profitability. So it's a major disruptor to careers. And besides the advancements in workflow, so how do you pivot, how do you think differently? How do you leverage your skills to put towards other areas of the industry?

Alex Petrone (26:35):

I think we'd be remiss if we didn't also mention the rise in interval funds. You've seen more coming to the market, we've launched one recently, managed some at my last firm. I think it's important when you think about that next marginal backstop and buyer in an outflow cycle. So your question Chris, on thinking about banks and insurance companies now that they're less active in our market when we have an outflow cycle, you always think through who's the next marginal buyer and in the separate account space, if you don't have cash, it's not going to be you. But as we see the rise of the interval fund structure and there's more and more of them coming to the market, that becomes your next marginal buyer through an outflow cycle because you have certainty on terms of liquidity and you don't have to worry as a portfolio manager around when is retail going to ask for liquidity. So there's a lot of shifting that's going on. The media market sometimes takes time to catch up because you've seen the rise of interval funds in credit markets and it's really helped in terms of liquidity in those periods where you have stress on the system. So I think more of that to come.

Christopher Brigati (27:46):

I think you highlighted some interesting points in the fact that the municipal market has historically been student body, left student body right when it comes to liquidity and that's really kind of worked against us as a group sometimes creates some unnecessary volatility and having those marginal buyers being available to provide liquidity is helpful. Not to mention the fact that the sell side of the market has been compressed, balance sheets are much lower than they were even pre-financial crisis days. We've seen a steady decline in the number of people in that space. And so it's interesting to see the fact that there's different dynamics at play with the sell side being able to be thoughtful about providing that liquidity at times. Everyone kind of alluded to the relative flatness of the yield curve but at higher rate environment. So there's good and bad with that. You've got your front end cash that you're trying to reserve to be able to deploy. But James, we were talking earlier, it also creates a dynamic where people are okay sitting on cash and as the investor gets a little bit more sophisticated and thoughtful, what challenges do you see with regard to the fact that the front end of the yield curve is still relatively attractive for very little duration risk? How does that impact your dealing with clients and how do you approach maintaining your own cash balances for thoughtful investment?

James Pruskowski (29:07):

Yeah, I wish that cash yields would go down. I started a business two years ago and it's really, really difficult to raise assets because of where cash is. People are just reluctant to reallocate out the curve. I think the fact that the Fed pivoted last year, the administration has stepped up red Eric about getting rates lower. The setup trade is now, hence I think the high end yields is intact and that money's going to have an excuse to step out in the long end and I think equity market volatility of the PE multiple is only going to help matters. So time will tell, but the setup I think is now and while it's encouraging to sit in income on cash instruments, you're not locking it in so you're eventually going to face reinvestment risk and hence why I'd rather front run it right now. Yeah,

Alex Petrone (30:01):

We've had a lot of success getting clients to push out of cash, but they continue to hold more than they'd like. We're seeing that shifting now. I feel like the macro economic environment has finally shifted in a way where we're comfortable that rates are relatively range bound, maybe will sit sideways over the course of this year and that there's actually a real risk that the Fed does a little bit more than is expected when you look through to the underlying economy and the broad consumer and how households are feeling. So when I look at the curve, it's steepened out a lot. It's important to remind investors and financial advisors the difference between the treasury curve that they use as their north star on a daily basis and the steepness that the muni carve offers. I agree with Ed yields are compelling here. Starting yields are a good indicator of FOA returns.

(30:53):

We're seeing investors that are thinking about their fixed income as one of several things, very importantly fixed income. It's finally that for some period of time. Hopefully my hope is that we stay in higher yields for longer, but also really importantly, the ballast for the unknown, the ballast for that view, that growth can slow and you want to have that allocation pushed out the curve near term. And candidly it helped us as well when we offer several opportunistic high yield strategies. So thinking in multiple buckets of what are we trying to do here, can credit continue to outperform? Likely, yes for all the reasons you've heard from us and the prior panel that talked about resilient credit spreads tight but likely hold in from here. Technicals are quite strong today and those yields in five and a half percent. It's drawing investors in 2024. I don't think 2025 will be any different. We'll continue to see demand.

Ed Paulinski (31:48):

And I think you saw that push of clients getting off the sidelines early last year when we thought the Fed was going to aggressively cut rates and that's sort of hit a pause for much of last year. So we do know there's a lot of cash on the sidelines. I think, and we touched upon this earlier, it's actually a good portfolio management tool to hold some money in cash in the portfolios, not pay a penalty for it. So while it's definitely hurt some flows into the market because clients have sat on cash outside of their fixed income portfolios, the positive thing is from a portfolio management perspective, it's actually allowed us to sort of add some protection in the portfolio if in the event we do see some volatility in the near term without paying a significant penalty for it.

Christopher Brigati (32:42):

So looking at some of the challenges that started this year, the devastating wildfires in la, I mean I remember back in my career getting phone calls from panicked investors that have exposure to a natural disaster event. I've traded bonds after Hurricane Katrina for Louisiana State GOs. That fell off the map because liquidity was an issue. How do you deal with the challenges from the investor side as they might be concerned about their exposure to something like an LAD WP or an Alameda California go that is literally devastated And how do you, talking about the ledge, what do you do in order to manage through that process?

James Pruskowski (33:24):

Yeah, I mean you got to know what you own obviously mean. That's what we're in the business of doing. You can't hide behind some mistakes. So you have to be at the forefront of holding investor calls delivered to transparency. Then engagement one-on-one. I mean we're in a performance business, but success is measured in several ways and transparency in education is certainly one of those. I think that that's really relevant. I managed institutional and wealth management money for the 30 years. I see Margaret out there who was alongside me. So managing PNC liabilities was always a part of managing muni portfolios, not double downing on where you're insuring exposure. So it may be new to retail, but being cognizant of climate risk, flood risk, all these sorts of things has always been part of the equation. It's just obviously more important now and people want to learn about it more. And I think the explanation of your process through transparency and education is just growing in importance and certainly, I mean it definitely makes you think twice. I mean I think it was S&P or someone talked about negative outlook on the power sector. So the litigation risks that exists in a new environment because of the impact of what's going on, I think it's pretty real and causes you to step back beyond just single name risk.

Alex Petrone (35:00):

I would echo. I think it's a really important balance between counseling clients being transparent, giving up to date information. It's very important to note that some issuers, some sectors, there's very bimodal outcomes here because of more frequent and more severe events, natural disasters that are happening. I think that the playbook that we continue to follow is know what those are, know where it's bimodal, make decisions of do I want to be underweight this type of risk because it's so hard to model. And then I think also as much as we hate to talk about are there things you're supposed to be buying in these scenarios, the answer is yes. It's not something that we feel great about saying is there an opportunity that follows because there's price discovery that's impacting issuers indiscriminately here, but that can happen and our job is also to say where are we supposed to be allocating our next marginal dollar as well. I think diversification becomes really important. This has been an ongoing discussion that you tend to have, particularly with California or New York clients who tend to stay in state. There's value in diversifying your portfolio for many reasons. For many reasons this continues to be one of them.

Ed Paulinski (36:23):

Unfortunately this was a rare situation where it hit a lot of our clients both personally and financially in terms of their portfolio. So there was the dual prong there. I think echo always said in terms of transparency and calming clients in those types of situations, Sarah who runs our IG credit team out there helped put a piece out just given all the client questions we were getting. I think one of the takeaways that I think will come from this and depending on how folks have been managing their portfolios, I think people are at different stages of this. Alex mentioned diversification. There's so many layers of how I think people would defer defined diversification. It is just not in state or out of state. It's just not obligor or sector or geographical. But what issuers are linked to other issuers or how correlated they are to each other I think was a defining moment of this situation because it just wasn't LA credits that were impacted. It just wasn't water and sewer credits that were impacted. So really knowing how deeply diversified your portfolio is I think will be a key takeaway from this recent situation.

Alex Petrone (37:46):

And then I think as well, trying to think about near term impacts, longer term impacts and instances that we've looked towards is in other instances in the last five or 10 years, should we start to think about out migration that occurs? What is the impact to the housing market? I mean these are things that are hard to predict today but are incredibly important to consider and talk about as it boils down to exactly what James said, know what you own and understand some of the near term and longer term risks to the balance sheet.

Christopher Brigati (38:19):

When we talk to our issuer friends out there. Any thoughts you have in terms of what they can do to help bring their deals to market, get best penetration, obviously bring more deals, bring lower rater deals at higher spreads, all the fun things that make sense from our seats sometimes, but any thoughts you might have that might help them in terms of deciding how they can better impact your portfolios?

James Pruskowski (38:44):

Yeah, I mean hedge your bet and issue some taxable munis. Diversify your interest expense. It helps market access over the long term and ultimately help you bring or get lower cheaper financing. I think so have presence in multiple different tax regimes. Structuring side, don't get fit too fancy, but make hold calls. There's a lot of algos that reject a lot of things and once you can start getting too fancy, we cut you off. So I dunno, in terms of I would definitely respect the retail order period. I think more dealers are coming without it or the retail order period is pretty fast. So I think that's hurting you.

(39:34):

I love competitive deals. It's instant satisfaction, like a bid wanted activity, you're going to get better execution. So that's another thing. And I don't know look at it differently. I mean I spoke to another group about this, but the index committee is made up of big firms talking about big things and how it helps them. The average deal size is 75 million and 7 million maturity for classification. The average deal size for you all is 35 million. So it's another way to get cheaper financing. Just speak up on some rule changes and be heard just as much as we are about the exemption.

Alex Petrone (40:18):

I mean Chris you alluded to it, it's a push pull. What I want is different than what the issuers want. I want more yielded deals. I want more spread out of those. I think you've heard from us the technical is really strong in some areas of the market. I mentioned high yield. We're seeing deals that we personally are passing on because they're coming to market with unaudited financials maybe two months out financials will be audited. We're not going to look at that. But if you're able to get the deal done with covenants that favor the issuer rather than the lender then continue to do that. Technicals matter materially from that push pull between the issuer and the buy side. What I do want to see is strong covenants, good collateral, audited financials. What I also would encourage, I mean you've heard from me, we're in the yield market.

(41:06):

We like to look at these smaller deals. We have actively managed strategies. We're happy to talk through structures for some of the smaller deals to figure out what makes sense and how to get things done. I think what a lot of issuers had already been thinking about as I talked to them last year was trying to meet the demand where it is. So for those firms that have 120 billion in SMA strategies, if they have very specific ranges of maturities that work for them, that can always play out depending on the project that you're financing in your balance sheet, but leaning into where the demand is to try to really optimize the yield.

Ed Paulinski (41:51):

Can I just say higher yields?

Christopher Brigati (41:52):

There you go.

Ed Paulinski (41:55):

I know I'm biased in the fact that the SMA trend is real and hopefully it's not a secret anymore, but I do think the market in general is becoming a lot more diversified in terms of the buyer base. Yes, some of the insurance companies and banks stepped back, but the interval funds some more active ETFs, the SMAs, more institutional type of separate accounts. So just looking at fund flows or looking at maybe your traditional buyers engaging where the demand may be because of that I think is not going to work going forward. So engaging investors, engaging market participants across the street to really know where the lows are going and where the demand is, I think will be huge benefit going forward.

Christopher Brigati (42:46):

Great. Alright, now a few rapid fire questions. Alex alluded to earlier, I had some thoughts on this and some of these have been answered, so if they've already been answered, just reiterate your response. Where do you think issuance is going to fall out this year?

James Pruskowski (43:01):

I think it's five and a quarter billion. I think the risk is much lower. I think it's front year loaded given the risks surrounding the asset class. I think it's front year heavy as well. So boats, well for the long end.

Alex Petrone (43:16):

I'd say 500 billion plus minus 25.

Ed Paulinski (43:21):

Yeah, we have a similar read about 500.

Christopher Brigati (43:24):

I might be a little higher. I had been in the 525 550 camp and I'm thoughtful that I might have to adjust that after some recent news in the past couple of weeks. Next 25 basis points in 10 year US treasury yields up or down?

Ed Paulinski (43:39):

Way lower

Alex Petrone (43:40):

Down

Ed Paulinski (43:41):

Would've been easier a couple of days ago, but still down.

Christopher Brigati (43:46):

10 year US treasury max yield, I think we've already alluded this as well, is the max in for the year?

James Pruskowski (43:53):

Most definitely Tens range. 150 BIP round trip on an annual basis. I think we touched three before 5%. Yes. Here

Alex Petrone (44:02):

I think we're in the rear view, 479.

Ed Paulinski (44:05):

Definitely a tail risk that it goes to five, but generally I think we've seen the top.

Christopher Brigati (44:11):

I'm in the tail risk camp on that as well. Total number of Fed cuts in 2025.

James Pruskowski (44:18):

Well I'm financing my position at s FMA plus 75 basis points and I'm two times levered, so I'm hoping I'm right. So four cuts with the market way under price starting in May.

Alex Petrone (44:29):

I'd say two coin flip.

Ed Paulinski (44:32):

Yeah, our firm view is two.

Christopher Brigati (44:34):

I've bet at one ratios now for 10 years and 30 years are at about 65% and 83% respectively. Where do you think ratios going to go?

James Pruskowski (44:45):

Don't really care. High apps as long as tax rates stay high and the rates and the multiple on yields stays, this attractive ratios can trade well through the breakeven rate.

Alex Petrone (44:56):

I think that they could end the year sideways with a lot of movement in between depending on technicals coming from heavy new issue or anything that drives any type of outflow cycle ratios with the amount of demand that we see should trend lower than the long-term historical trends.

Ed Paulinski (45:15):

Obviously a lot depends on all the topics that were talked about already this morning, especially with respect to tax policy, but I think with some bouts of volatility throughout the year, they end the year pretty much where they are.

Christopher Brigati (45:29):

Great. We got a few minutes left if there are any questions out there to throw at our esteemed panel of experts. You got one right here.

Audience Member 1 (45:43):

Okay. Yeah, my question actually was about the velocity of money on the investor side. One of the traders I had been speaking with recently was talking about that there had been a huge movement that normally retail and I was wondering if SMAs had a lot to do with this and then also the technology that's supporting SMAs, that the turnover in funds was moving from six months to two weeks so that you had a much shorter timeframe in terms of the reallocation of funds across the curve. Is that something you're seeing?

Alex Petrone (46:16):

I think velocity is often tied to volatility. If you think through an entire cycle, turnover in a fund should probably be somewhere in the 40 to 50% type of range through an entire cycle as rates are coming down and spreads are tightening less because it's tax inefficient to turnover your portfolio as rates are rising and spreads are gapping out or there's volatility, chances are there's more velocity in a portfolio, whether it's a separate account where you're actively managing the tax efficiency or a fund. So I think a lot of the higher turnover is really related to the market dynamics and not necessarily the vehicle or the structure. What I would layer on top though, if you think about SMAs, what I've learned in my career is they are incredibly sticky assets. This is a long-term part of an asset allocation. Funds can also be quite sticky, but they are a bit less so and so that can create different sort of velocity around that question. But it's just a question of which angle we're looking at.

Ed Paulinski (47:25):

I think what's also underlying theme is that the improvements in technology and the rise of electronic trading has just enabled a lot more efficient ways to manage and trade portfolios. So the ability for us to actively manage a portfolio, whether it's regarding duration or tax loss, harvesting the ability to do that, we can react quicker and more efficiently now than we could do a couple of years ago. And that's for sure given a rise to just the amount of trading that's being done on a daily basis.

James Pruskowski (48:07):

Yeah, I think this related to your question, but the volatility is creating a tax loss environment all year long, whereas historically it's been at a point in time. So I think that where we're at in the cycle is partly due to the high turnover.

Alex Petrone (48:22):

And then I would add, I mean alluded to this, investors are demanding more, right? We know investors, they always want more and they got used to separate accounts that maybe were more passively managed and now they want the active SMEs, whether that's munis exclusively or looking across the entirety of the fixed income spectrum. So this will just keep pushing forward In terms of activity.

Christopher Brigati (48:46):

There's one over here.

Audience Member 2 (48:49):

Okay. How you about disclosure getting information?

Christopher Brigati (48:56):

I'll repeat it. The question was about disclosure and getting information from issuers that investors might not be seeing.

Alex Petrone (49:11):

I think disclosures have improved materially. So yes, we are getting the information that we need generally speaking, and in instances where we're not particularly as we move down the credit spectrum or into smaller deals, then we ask, we ask and we're pretty specific through that.

James Pruskowski (49:30):

Yeah, I think just the timeliness of it, the routineness of it is more the complaint than anything else.

Audience Member Pam Federick (49:38):

Over here. Hi Pam Frederick, Battery Park City Authority. Just a question, I think I'd start with Jam because you've mentioned the retail order period. If you could speak to, given the increase in SMAs and the fact that they seem to trade more like an institutional account, the rationale or continued support for having retail order period, if you can just give a little more insight into that would be helpful.

James Pruskowski (50:08):

Yeah, it's the backbone of the market. I mean the wealthy subsidized this asset class and if we're arguing about the exemption, that's the biggest complaint. I mean the asset class subsidizes the rich, but respect the order period because there's a lot of pent up need earned demand and part of the opportunity set is the workflow challenges. So I could warehouse risk and dump it back off to late adopters. That's a powerful trade. So you could prevent that by just having more order periods or respecting it, make sure you check your zip codes. There's a lot of accounts in there that there shouldn't be things of that nature.

Alex Petrone (50:52):

I would add though, I don't want to take the other side. I think retail order periods are critically important for ensuring that all investors that want to participate can, and the more demand you have, of course then your financing costs should go down. I think we've been in this period where sometimes the acceleration of the retail order period into institutional is not just symptomatic of tremendously robust demand in the retail order period, but also we've had so much rate volatility that sometimes you don't want to carry a retail order period into the next day. And I can sympathize with issuers that choose to do that. I always think that the obligation is on us as well as our sell side salespeople to keep us apprised of when retail order periods are accelerating, or in those instances where they don't exist, we just go in as an institutional buyer that benefits from the retail order. What we like to see from issuers is the institutional retail order period that we can be included in it. But that's benefiting me.

Ed Paulinski (51:56):

And again, I'm definitely biased in this answer, but as orders are being put in for underlying clients who definitely are the backbone of the muni market, to us it's super important to make sure that bonds get into those clients' hands and not into trading accounts because at the end of the day, in most cases then it actually does not benefit the end investor, which ultimately is what this market is for.

Christopher Brigati (52:29):

I think back in my experience with retail order periods, and we would have to document the zip codes from the investor at a point in time, and that was because the issuer wanted to make sure that the end benefit of the retail order period was being received by that investor as opposed to an institution. So though the money might be professionally managed, the end beneficiary of the participation is that client on the end of the SMA portfolio. So to me, being thoughtful that you're just trying to get to that point is important and it avoids the ill faded F word in the market, the flippers. And that's changed a lot in recent years. But the fact that from an issuer perspective to see the end client benefit and that might be a constituent within your local municipality getting bonds that they otherwise would've a hard time getting speaks volumes to kind of the underlying theme of the municipal market. Historically speaking, at least I believe we're out of time. So thank you everybody. Appreciate your reflections.