Amid the most volatile stretch in the municipal bond market since the onset of COVID-19, some of the muni market's top minds convened at The Bond Buyer's Texas Public Finance Conference in Austin, TX for a panel discussion this morning, the full video of which can be seen by Bond Buyer subscribers
Below, you can see a breakdown of their insights, organized by topic and speaker, as they weigh in on the sharp rate moves, shifting investor behavior, and the lingering question of potential tax policy changes.
Historic Rate Moves
Alex Chilton, Head of Municipal Securities, Morgan Stanley
- "I did a little bit of research, and I looked up all of the muni changes since 1981 — thank you to the fine people at MMD for having that information available to us — and the largest muni changes, the first three of them were in COVID, increases in yield. The fourth was in 1981, the fifth was in COVID, and then the sixth and the seventh were Monday and Wednesday."
- "If you look at the data a little bit differently, this is actually, if you add up the first three days — Monday, Tuesday, and Wednesday — 90 basis points. That is the second-largest move since we have data here in the muni market."
Market Sentiment and Outlook
Sean Carney, Chief Investment Officer, BlackRock
- "I think we'll still see some buying into the weekend. And where do we reset on Monday? We have to figure out what happens with the calendar. The calendar has been large. A lot of it went to the sidelines. How much of it goes back?"
- "Demand creates supply. When that demand curtails, so did supply, which is healthy, because had the supply continued to come, it would have said that issuers were much more concerned about potential future tax policy, and that would have just pressed on the market that much more. So it feels like we've got good footing."
- "This past week has put a lot of uncertainty in the market. In general, that cloud is not going away. Unless you have a high probability that there's going to be a tax change, that stress is going to disrupt the market. I think retail is really going to care about these yields and getting invested as we start to get on the backside of the issuance pop that we get in March and April."
Tax Policy Uncertainty
Molly Shelhorn, Senior Research Analyst, Nuveen
- "Historically, retail has not responded well to shock and tends to overreact. I would not expect any significant move ahead of anticipated tax policy. I think we really are going to have to wait until we have some certainty on what happens with the Tax Cut and Jobs Act policies."
Sector-Specific Observations
Jaime Doffermyre, Head of Public Finance Syndication and Origination, Truist
- "I think there's a lot of uncertainty in the market in the healthcare space and the higher ed space, and it has a lot to do with federal funding," he said, adding there's "a lot of opportunity in the higher ed space because it's been kind of beaten down."
Odds of a Shift in the Tax-Exempt Status of Municipal Bonds
Jaime Doffermyre
- "Zero."
Sean Carney
- "I'll go one in five. So 20% chance. We don't believe the tax exemption itself is on the table, but in a shared sacrifice scenario, could there be a cap put on high earners or a carve-out of certain targeted private activity bonds? It's possible. This administration has already proven, though, they'll do things that are very difficult to handicap."
Molly Shelhorn
- "It's not zero. We definitely think there is a threat to private activity bonds. Some erosion on the tax exemption for some subset of private activity bonds is likely."
John Murphy, Director and Head of PFM's Investor Relations Advisory Services
- "This is my opinion. I'm at 10%... But there will probably be some changes that will be tweaking it around the edge. I don't think overall, the whole tax exemption goes away."
