Issuers and sell-side teams should consider shorter structures for deals, with a focus on the 10-year part of the curve, to appeal to the explosive growth of separately managed accounts, buy-side analysts say.
With various factors shifting investor interest, including federal policy uncertainty and interest rate volatility, it behooves issuers to think about their deal structures to cater to what investors prefer.
Investors like the 10-year area of the curve because "if they're buying duration, the tax-exempt market is usually going to be one of the best places to buy," said Wesly Pate, a senior portfolio manager at Income Research + Management.
"Buying duration is both offense and defense. It's offense because you're actually buying it on a steeper yield curve, so you're having to increase roll down," he said. "You're also buying it on defense because it's the asset class that tends to outperform in a backup."
Issuance of five- to 10-year paper in 2024 accounted for 20.3% of total issuance, closely followed by 10- to 15-year paper at 19.3%, according to a J.P. Morgan analysis. These figures are above the 10-year average of 19% for both maturity buckets.
While year-to-date the maturity buckets have seen their percentage of overall issuance fall from 2024 figures — the five- to 10-year maturity bucket sees 17.9% of all supply, while the 10- to 15-year area of the curve with 18.2% of issuance — they are still the highest proportions of total issuance among all maturity buckets. The next largest total issuance is the 15- to 20-year maturity bucket with 16.5%.
Some of the demand for 10-year paper stems from SMAs, which have seen explosive growth over the past several years.
Household ownership of munis — which includes direct ownership of individual bonds in brokerage accounts, fee-based advisory accounts and separately managed accounts — surged to $1.86 trillion, up 3.4% from Q2 2024 and 15.1% from Q3 2023, according to the latest Fed muni ownership data.
"A lot of issuers, underwriters and financial advisors are paying more attention to demand in that product type," said Ed Paulinski, a portfolio manager and head of municipal separately managed accounts at Goldman Sachs.
Most SMAs usually only invest out to 15 years, so that contributed to where issuers tend to focus and deal with risk, he said.
A lot of the demand was driven with "big flows" into SMAs, and they tend to have a slightly shorter duration profile than older traditional mutual funds, said Tim McGregor, a managing partner at Riverbend Capital Advisors.
"So you saw some demand pattern shift from little bit longer-dated maturities, which was open end mutual funds historically, into more intermediate-duration range via SMA vehicles," he said.
"To the extent that you're an investor who qualifies for an SMA, which means you're A-plus-rated and above, you're not in one of the perceived offensive sectors, or you're not going to structure your debt with a put or a call or anything that SMA buyers don't like, then catering to that demand makes a lot of sense," said Nick Venditti, head of municipal fixed income at Allspring. "You can sell into that."
Those buyers tend to be looking less for alpha than beta, he noted.
"They want very efficient, cost-effective access to the market," Venditti said. "And so if issuers are providing efficient, cost-effective access to the market that checks the box on the investor side and the issuer side, likely they can issue that debt a handful of basis points cheaper than they otherwise would have been able to do."
Other factors played a role, such as the issuance from certain sectors — like prepaid gas and healthcare — which focus on that intermediate part of the curve.
For instance, there have been several sizable prepaid gas deals over the past several months, including Tuesday's $781.2 million New Mexico Municipal Energy Acquisition Authority gas supply revenue refunding and acquisition bonds.
Many of these deals see an eight- to 11-year put structure, thereby adding to the amount of 10-year supply, said Jeff Timlin, a managing partner at Sage Advisory.
Comparatively, "normal or more traditional" deals that come to market are structured with serials from one to 25 years, and then term bonds from 25- to 30-years, he noted.
Investors also have concerns about Federal Reserve policymaking and messaging.
Many clients "across the spectrum" — in SMAs, exchange-traded funds, mutual funds — moved out of cash last year, and there were flows out of short-duration products into intermediate-duration strategies, Paulinski said.
"So a lot of issuers were just following demand broadly — where they saw money going — to the extent they had flexibility in the deal," he said.
The growth of 10-year paper could have also been a function of 2024's explosion of Build America Bond refundings, said Jock Wright, an underwriter at Raymond James.
"Maybe those staffs didn't have much outstanding, or if they were getting taken out, the maturities might have been around 10 years," he said.
"It was not abnormally large, but there was definitely more supply about that part of the curve," Wright said.
This year, some have noticed more issuance in the 10- to 15-year range than the five- to 10-year.
"It's more of a reverse inquiry where demand is in a given week," said Ajay Thomas, head of public finance at FHN Financial. "It seems like each day is a different market right now [as] the market is so volatile."
A combination of the new administration in Washington and the policies that are coming out "fast and furious every day" are shaping the market, along with the Fed as it adjusts its messaging, he said.
Investors are taking a "wait-and-see approach" to follow interest rate movements and assess where opportunities lie, Thomas noted.
Many of the contributors to the increase in 10-year paper will continue to be large drivers of supply this year, though the effects will differ, Paulinski said.
SMA demand will become a more significant part of the market and will have a larger say in deal structure in the future, but "the investor flow dynamic in terms of where investors are sending in money, given what the Fed may or may not do, will be determined based on where flows go starting in Q1," he said.
"Given the uptick in volatility over the past couple of years and the more diverse investors and product types in the market … issuers have to be a little bit more flexible when it comes to investor demand," Paulinski said.
"Yes, there's insatiable demand for munis just given the lack of supply historically," he said. "There's still a starved market from a supply perspective, but there's more diversity for investors than ever before. So issuers and underwriters are definitely paying more attention and structuring deals to fit a wider audience than they were in the past."
