- Broadening of the investor base
- Examining the new normal in the current rate environment: volatility, outflows, widening spreads
- High yield vs. high grade
- Growth of SMAs and ETFs
- Taxables
- Their role for muni market now that advance refinancing is not available
- Will they comes back after rates stabilize
- ESG: Sustainability analysis: Would investors charge a penalty or pay a premium?
Lynne Funk (
Hi everyone. Welcome to the buy side panel. The last of the day, Thank you for being here and welcome. I'm Lynne Funk. I'm the executive editor at the Bond Buyer. And, with me today is Howard Cure, he's director of municipal bond research at Evercore Wealth Management, Glenn McGowan, managing director, municipal Syndicate at RBC Capital Markets and Aude Rajonson, head of fixed income origination at the London Stock Exchange Group. So, we are gonna talk a bit about, we're not all true BI siders here with the exception of Howard, but, really kind of a discussion about, what are investors looking at? key topics there, what issuers should be perhaps providing what's on the radar in the buy side and the sell side right now in the market. So, I guess I would like to start, maybe Glenn, you could kind of give us a little overview of sort of the macro general market picture of 2022, which as everybody knows, and this room has been quite volatile.
Glenn McGowan (
Sure. Lynn, happy to do that. Thanks, I'd like to thank both of you for showing up for the last panel of the day. We understand that the most dangerous place in the municipal bond industry is between cocktail hour and a bunch of, muni participants. So, we're glad to be here glad to be here in, person after a little bit of a hiatus. So, I think as we all know, obviously 2022 is a story of volatility. It's a story of, global central banks really moving from accommodative policy that in some way, shape or form has been in place really since the global financial crisis. But, particularly since the beginning of COVID. So, that March, April, 2020 timeframe, and shifting away from an accommodative policy into a restrictive policy, but on top of that, you've got geopolitical risks, tensions between the U.S and China. You've got, the continuation of the Russia Ukraine war, which is, disrupted supply chains for oil and gas, agricultural products, other, commodities. It's particularly relevant now, as you think about the economic outlook in Europe, heading into what could be a very challenging winter for businesses, for households, the flow of natural gas being, weaponized and shut off, you've got COVID lockdowns and parts of China putting further, strain on global supply chains. And then obviously the global economic outlook that continues to be quite bleak. And so I think when you look at all of those, themes in a blender, probably the most relevant of them of course, is the shift in central bank policy. But what you find is that the volatility, the uncertainty, the lack of conviction is across markets. As of today, I took some notes this morning and I had to scribble most of them out because the markets just continued to to deteriorate over the course of the day, but the S and P down 17 and a half percent, So, far this year, the IG index, the Bloomberg US, a good 40 or 50 actually now basis points plus wider since the beginning of the year, the sell off in 30 year treasuries, pretty significant to the tune of about 160 basis points, 30 or MMD. Now, north of a 200 basis points sell off over the course of this year. And so I think what you see is, volatility that has made the markets, is just uncertain and how investors kind of orient their portfolios around that is a topic of, continued interest, on a real-time basis. We have, lighter, new issue supplies so far this year, we're down about 14 or 15% year over year, taxables, which last year comprised roughly 25% of the calendar of the year before that 2020, it was about a third of the calendar. Now we're down to maybe 15%. And that, that number seems to be dropping week after week. we're annualizing maybe to about, 385 ish billion. It's a sub $400 billion, year, the way things are playing out now in terms of long term issuance. But at the same time, the investor base is losing capital on what seems to be a weekly basis. We've had all, but just a few weeks this year where we've had mutual fund outflows, when you look at the weekly reporting numbers that we get from Lipper, it's about 53 billion of total outflows so far this year, if you look at the monthly Lipper numbers, that's another 31 billion. So, an aggregate about 84 billion of capital that has left the municipal bond market as interest rates have risen as credit spreads have widened, and at the same time, significant selling pressure in the secondary market. One of the data points we look at on a pretty ongoing basis is the, bid wanted volumes in the secondary market. And, that's perhaps the best proxy for selling pressure. And over the course of this year, we've had I think 174 or 175 trading sessions. And almost 70% of them have seen bid, wanted volumes over a billion dollars. There were only two sessions like that last year. And if you add up all that selling pressure, all the bonds out for the bid so far this year, it's well over 200 billion. So, as markets are recalibrating and there's significant uncertainty and a lot of, lack of conviction as to where to put whatever remaining cash is there, we've seen money, leave the marketplace. We've seen interest rates rise and, and it's really been the story of underperformance on the part of Munis. So, I think where we go from here is a function of, fed policy. It's a function of volatility and treasuries. I think, that the trend of mutual fund outflows is highly concerning. And I think it's a proxy for, continued outflows going forward. If we can't get some stability in treasuries, but you take even a morning like this morning where we had the CPI number, it was supposed to, by most forecasts show, a little bit of a deceleration and inflation trends. And in fact, it showed just the opposite. This session alone, you saw, stock sell off anywhere from, the indice is anywhere from four to 5%, one day alone. And that just goes to show you how fragile the market is, how little there is in terms of conviction for where, investible dollars should go. And, I think you're gonna see more of that going forward. So obviously next week, we've got the September fed meeting. There's two more meetings after that one in November one in December, the future's market is pricing in another 25 basis point increase of hikes even from yesterday. So, yesterday was, 75, 50, 25, there's another hike in there of 25 someplace. So, whether that's a 75, 75, 25 or 75, 50 50, that remains to be seen. But I think the recalibration of interest rates away from what was, sort of a controlled fed, induced, low rate environment to now a market that has to function largely on its own at, the same time that you're seeing significant cash outflows. That's a very turbulent, environment and the market hasn't really performed well as a result. We've, underperformed pretty significantly.
Howard Cure (
Let me just, concur and add you wanna be additive, not repetitive. So, at Evercore, within our municipal bond portfolio, we deal mostly with single managed accounts, high net worth individuals. I've been doing this for a long time, and we have not seen this kind of movement in such a concentrated short period of time. In the 35 plus years, I've been doing this and our clients get their quarterly statements, or they can check it every day for that matter. And they're seeing negative numbers, not only in their stock portfolio, but in their bond portfolio. And, we got some explaining to do about that. So, and our portfolio managers are trying to figure out just where or how to invest. I mean, it's the short term rates are going up higher. If you look at the shape of the, yield curve, that's very attractive. And to their credit, they had kept the portfolio shorter than the benchmark. And we're measured by the benchmark. We're still negative, but not as negative as some of the benchmarks. So that, helps explain some of it. And then it seems as if every time you say, well, finally longer term debt is looking attractive. Let's buy it, they've been burnt. And again, it's just paper losses, because frankly for most sectors within municipal bonds, cities, county, school districts, all the enterprise systems and higher ed housing, it's not a credit issue. It's all driven by. It was a credit issue a couple years ago when the pandemic hit, but not now. So, that is the big question by a portfolio managers is what's the most advantageous point of entry. Do we think that the inflation issues are gonna abate eventually? And, then what happens if there's a recession and there starts to be cuts in rates, that's where you wanna enter at right before that moment. But if someone knows when I would love to hear about it.
Lynne Funk (
Yeah, it seems almost that it's like you blink, Friday, I was just prepping for putting in rates for the live market survey that we did earlier this afternoon. And I looked up and I was like, oh, eight, eight higher today. So, sorry, those were incorrect. But, in terms, speaking volatility. So I guess to, you mentioned credit Howard, and you are a credit research. So we, you just said this isn't credit. This market volatility isn't driven by credit. Do we think, do you think that perhaps, how is it fair? How is issuer credit fair given all of the things that Glen laid out there given, given all of these, these challenges?
Howard Cure (
So, two and a half years ago, when really things were starting to cook March of 2020, I don't think anyone expected, the economy to play out the way it has. So, you didn't expect this kind of concentrated, extensive federal aid. So you got direct federal aid to governments, local governments, and then you have all the other federal aid packages that helped local governments. So, things just like making sure unemployment benefits are there, or, child tax benefits are there, or the payroll, protection program are there. So it's not only federal money is coming in, which are gonna be spent. And everyone's worried about it. A lot of the revenue base really improved. So you look at things like sales tax, because there was a shift from services, which oftentimes are not taxed to durable goods, which are tax sales tax revenues have really gone up a lot. And then you look at income taxes for a lot of States's usually progressive and wealthier people did better during this. They were able to work. They were getting money and the stock market, up until the end of 2021 has really done well. So the capital gains tax really went up a lot as well. So you got this money coming in and then you have to sit back. Well, states have record amounts of reserves. The revenue base still looks like it's holding up pretty well. What can go wrong? Well, how prepared are they for the recession? Just from a basic recession. They seem pretty well prepared. You have a lot of states with 10, 15% of their budget set aside in reserves. What I'm concerned about going forward is the social impact of the pandemic and the costs. I hate to start looking at the statistics on learning loss for education and how you're gonna support that the property tax base in certain cities, which is lagging needs to be reassessed. What happens with companies that decide to scale back on their footprint? In some places like in suburban areas, which had been flat for years, those assessments have gone up, but what's gonna happen to the cities. Transportation is a whole nother issue. And just the pandemic exposed a lot of the income inequalities because it's the poorer people, the working people have to show up otherwise they don't get paid for work. How could you do things like raise fairs on mass transit or cut back on services on that? What happens to the education system? What happens to the job training? So, I think you have those expenditures out there that are concerning you question just how reliable the tax base is. The federal government. I've never spent so much time thinking about who's running the federal government and which party as far as help for local governments and state governments are concerned. So, and then you worry about how disciplined states are about spending money that they got from the federal government for one time expenditures versus recurring expenditures, even though there's a need to help a lot of, poor working class people. So, right now it's a calm, I'm afraid it could be a calm before a storm, but that's how we're looking at it.
Lynne Funk (
So, somebody as another panelist earlier today was saying that the muni credit probably is that it's best, it's been in a long time. And I, a lot of that was due to the federal aid that was pumped into the system. I think to a certain degree. So that was kind of where this question came, but it originally came because was before times there were some problems, right, that existed. And then the federal government came in with these aid programs when, are those still there, but you're kind of intimidating that there are new problems too, that we need to have on our radar.
Howard Cure (
There are new problems. And I'll just say one more thing thing. And then I wanna hog up this panel, but states that behaved badly that had bad budget practices, weren't transparent, really have big pension issues and weren't balancing their budget appropriately, gotta reprieve, but there's no reason to think that they won't revert back to their bad behavior. And that's something we're just waiting to see on and I'm just cautious.
Lynne Funk (
So, let's talk a little bit about, what Glen touched on in general is which issue issuance this year. I kind of wanna move into, we're down 14%, but that really is led by what a 45% drop in taxable issuance. And I think, issuers clearly have pulled back on issuance in general, but I wanna talk about taxables in refundings. How has lower taxable issuance, affected the overall market and, will we see a potential return for taxable issuance once rates stabilized? Is there still a mathematical possibility for taxables?
Glenn McGowan (
It's a good question. I mean, for, a two to three year period, we were refunding certainly fives in often cases, 4% coupons with, taxable par bonds. The rates were as low as one, mid to high one handles, on, on some of the transactions that we led. And, certainly the rate environment is, no longer there. When you think about what happened with the bad issuance in 2009, 2010, that was primarily long dated new money, financing, obviously with a, healthy subsidy from the federal government. the pace of taxable issuance that we saw in 2020 and 21 really was more, it was shorter on the yield curve, by and large. It was a lot of serial bonds. there, there were still some term bonds that were sold of size, but not nearly as many index eligible term bonds in 20 and 30 years is what you saw during the, the Bab phase. So, it was primarily, a product that you saw, pretty good crossover participation from insurance companies and mutual funds. But that the sort of traditional muni investor had the ability to play in when muni ratios were, were tight. In other words, taxable munies during that various points in time during that, issuance pace in 2020 and 21 appealed to a lot of the same buyers who could also buy tax exempt bonds in a higher rate environment where tax, exempts have dramatically underperformed, their, their treasury counterparts, a, the appeal of a taxable muni to that same, exempt buyer has diminished greatly. They'd rather have the fuller coupon and the, and the, and the tax exemption on a regular traditional muni bond, given how cheap ratios are, but B the dynamic of rates boxing, those or refunds out. I mean, that's, I think, here to stay, I think there will continue to be a place for taxable municipal bonds for, healthcare and higher ed type issuers that tend to have a little bit of a, broader, use of proceeds mandate perhaps, and maybe a traditional governmental issuer. And, you'll still probably find some mixed use and, and spend down, related issues that could drive municipal issuers down the same path, but pre 2019 taxable issuance was less than 10% of the market. It was something like seven to 8%, whether we get back to seven or 8% or it's something in the low teens that remains to be seen. But I definitely think that, right now for the, for the investor base, the exempt product makes a lot more sense. And from the refunding perspective, we're just, we're in a different rate environment.
Howard Cure (
Okay. Let me, just add, a couple of things. So, right because you do a tax exempt advance for funding anymore, and I know various organizations are pushing to restore that it and the relationship between Munis and treasuries were such the pre fundings work that way and where economical, there are certain types. I think there are, advantages for issuing taxable debt that have been further explored besides, dealing with pension obligation bonds, which has to be taxable issues, and coming more into favor, although I'm, dubious of that. And I agree with the GFOA that it's a bet. I've, and you mentioned higher ed, and it's interesting. I saw a presentation California state university system, which used to have 90 plus percent of their portfolio in debt tax exempt now has about 40% taxable. And it's more than just doing the refundings. It's you think about the climate now, you don't, if you issue taxable debt, you're not, constrained about how quickly you have to spend the proceeds and in an inflationary period where you want to set this money aside and invest it and waiting for, construction costs to come down. It's not a bad alternative. So it's, something, I think it will grow not nearly as much as it was the last couple of years, but the traditional sort of eight, nine, 10%. I think you could see it more in the, teens, if not 20%. And, I know we want to bring already into this discussion about what it's like on, on the European side and the appeal for expanding the base, but I'll, let you take care of that question.
Lynne Funk (
Thanks, Howard. No, but that is a it's a very good segue because I wanted to, oh, to kind of talk about, from your seat. And the reason I I ask about taxables right, is because it has, it did, it started in 2009, 2010 with Babs, really kind of expanding the muni by our base, informing more people of what munies were, particularly taxable investors and foreign investors. And then, fast forward to 2019, 2020, there's more interest, there's more interest international. We can see it in fed data it's growing. It's not huge, but from your seat, Ode would you tell us a little bit about, why you, what you're seeing, and how Munis can sort of drive to expand their investor base? Yeah,
Aude Rajonson (
Yeah. That makes sense. No, it, what's interesting with the sort of us muni market, it's a sort of very domestic focused market, right? There is a little bit of, international investors coming into deals, but really it is really domestic, unlike any other, muni markets in the world. So, the city of Mount moon, Sweden, the city of Tokyo, they will issue international bonds. and we've seen it in the us to some extent international finance corporation issue bonds internationally. But I think, in really in the us muni market, what's interesting is given the current market backdrop, there's a lot of merits in actually broadening investor base as a way to really tap into the liquidity that it's not only just in Europe, but like in a middle east and in Asia and beyond and the reason for that is it allows, munies to access to extra liquidity, at primary insurance broadening investor base. And when I talk about investor base, I really mean, institutional account. So, that will be your, UK, fund managers, your Swiss, private banks, your German pension funds, for example, your French pension funds. It's not gonna be targeted at retail because the retail market is too far removed from the muni market. I very much doubt that your French pensioner knows much about the muni market to be able to invest. So it's really institutional fixed income investors, that we are looking at, but adding that extra, these additional investors on top of the current investor base, allows the Munis to really broaden their investor base. And, ultimately, there's always a price benefits at the end, right? Because it creates more demand for the instrument, better distribution, broader distribution. So, ultimately, bit of a price tension when it comes to pricing the transactions, spread compression and of obviously a bit of, price tightening, but also it helps with boosting the secondary market, trading. And it's interesting for example, that, 70% of the global secondary bond trading takes place in London. So, there is an active international sort of secondary market trading that muni can really tap into. But I think in the context of, current market backdrop, we see a lot of Munis, outside of the us, tapping international market as a way to, sort of leverage the interest rate differentials that we see across regions. So, the central banks, across the world have, sort of started their monetary, Policy tightening, but the pace at which they're doing so is different. The fed is really focused on tackling inflation, whereas, the ECB in Europe is really focused on growth. So that means that interest rate in the us are, in a hike. And so is, the ECB, but at a slower pace. So you do get a gap in interest trade. It can be significant and it's widening. And I think it's here to stay as just looking at the rates this morning. So, the tenure treasury rate, is about 171 basis point wider than the 10, German BOS. So, for a lot of issuers, and that includes Munis. There's a lot of benefits into looking at alternative source of fundings and tapping into different market as a way to really achieve optimal cost of fundings, right. Even taking consideration, for example, swapping the proceeds back into dollars. There can be some potential cost, cost savings here. and so that diversification invest investors a lot of advantage, for munies, but also from investors based in Europe, because from their perspective, it's a great way to have access to diversify their own portfolio by, through sector, structure, but also geopolitical under underlying risk, whilst still investing in safe assets, right? Because us munies are fairly safe. They are government they're us, sort of government rates with a bit of a premi but really there are safe assets. And, we know that when the market is highly volatile, where investors wants to place their money, it's always in safe assets and not in high yield or emerging market. So the, potentially one could argue that there's a lot of demand, coming out of the rest of the world. .
Lynne Funk (
And perhaps we can talk a bit more about the education efforts, to tell what munies are. But I do wanna pivot for a second because, for a few minutes, I know everyone's favorite topic. We're gonna touch it, ESG, because it day emerge, much of it has right. Emerged from odd scene, from, from Europe. So, I think, let's start with Howard though, because I think we'll let you, we'll you play cleanup, oh, but Howard, you, you have some thoughts on ESG that you wanted tto kind of put out there from the buy side.
Howard Cure (
Yeah. I am cautious, dubious, cynical maybe is about ESG. Not that I'm cynical about the risks involved, the environmental risk facing being faced by municipalities, the social risks, the governance issues that I buy into, I just am curious from a buyer's perspective. Cause I speak to a lot of clients. We have California office, and this seems to be the laboratory for the demand in the United States. Although it's nationwide, we sit down with our clients and we ask them just, what are they thinking? What are they trying to accomplish? And a lot of the discussions on the environmental and sometimes social issues and environmental issues don't always work together or the governance issues. So we're trying to figure out what their thought process is and go through a series of questions on that. So that's number one, number two, is if municipal bonds don't work for a client, depending on what their tax situation is, cuz it's still a retail driven market over 70% individuals or mutual funds. It's not gonna work for ESG type bonds where the proceeds are used for those type of, projects. So in other words, if it's not advantageous to buy a muni bond and you're better off on a return point of view from buying a corporate bond, this is not gonna change. And, then there's really hasn't been yet any differentiation between, concurrent series, an issuers issuing series A and B at the same time, same structure. One is sort of ESG approved, environmentally approved or green bond. One isn't there hasn't been any sort of differentiation yet in price. So, what happens when, there is, and presumably the goal is to, have the demand be great. If demand is greater, could drive down the price of the issuance, but would a client of ours, an investor want to sacrifice some yield based on that. And, that's a theoretical question that may somehow, be, be, be brought to the forefront earlier. Other things that I think about is, there are a lot of funds that have put together ESG focused purchases and they charge more money to put together that fund versus a basics, a municipal fund or a corporate fund. And, I'm not sure what folks are getting now. I I'll expand it a little bit to the corporate side. I mean, so far ESG funds had been doing pretty well because on the corporate side, they were focused on technology and away from say, mineral extraction oil stocks, and they got hit hard and that's reversed. The other thing about environmental issues. I think it's a substitute, for what would be a better way to address the issue is that some sort of carbon tax, how do you penalize someone who's committing some polluting act? Do you do it through the capital markets and make it more expensive or try to make it more expensive for them to do business? It's a very roundabout way versus penalizing them directly. But I don't think there's a political appetite or will to do that then within the muni market. Again, we had discussions about what the, 10, B five disclosure is on and getting some consistency on that, but really the SEC securities and exchange commission is putting together some sort of disclosure consistency for corporations, but municipal entities are not guided by that. So, there is not, any way, any kind of consistency on the disclosure of this. And then just starting to get together or judging from key performance indicators or sustainability performance targets about whatever project they're doing and that hasn't been fully developed yet. So, and then one more point, and then I'll stop being quite as cynical. Cause It's not as if the risk don't exist. I just don't know if your society, trying to fix it through the investment mechanism is the way to go. You have a lot of states individually, cause this is very segmented market and states really control the issuance on fighting these types of disclosure or, requirements on a lot of their issuers. So, you can't have that kind of inconsistencies in some states and regions being so supportive of it and some being very antagonistic toward it. So yeah, I have issues and I try to work through this with our clients that understand, clients are always right and we certainly will accommodate them on this, but I, would be remiss if I didn't point out a lot of the shortfalls that I think are inherent in this system right now in the United States.
Lynne Funk (
So, let's turn it over then to ode and talk about from the European perspective, because this reduced, So much of where the ESG has come from has come from European investors. And, oftentimes folks say that there's just leaps and bounds ahead of the US, but there is clearly a demand. I mean, you can't, you can't talk to certain investors that are just, they, want an ESG bond. So from your perspective, what are you seeing over the abroad and how, what do you think the benefits are of countering countering Howard showing how this is a beneficial aspect of?
Aude Rajonson (
Well, I think it's fair to say that, Europe has, is far more advanced or is more advanced, when it comes to ESG than, the US is. And you can see that because, obviously there's a lot of demand, right? for a lot of, investors, even your institutional investors, they all have now a part of their portfolio that they look at the ESG, assets. So, there's a lot of demand and that demand that great demand is translated into pricing benefits for issuers. And, I know we were, there was another panel earlier today. I was saying that it's difficult to quantify Greenham. But the more investors that you, you tap into, the more likely you're gonna get to, you're gonna be able to tighten your pricing. And, we've seen it for a lot of ESG deals that, tap into that global liquidity, including the European liquidity. I mean, we have the UK government, a lot of it's driven by a lot of sovereigns, or sort of public finance entities. But for example, we know we, priced, the UK government did a green bond, green Guild last year, and they raised, they wanted to raise, 10 billion, Sterling and there was demand for, a hundred billion, so that obviously allowed them to just not only tighten the pricing, but they were able to just do a top, about six weeks later. So it's, there's, there's clear pricing benefits, in from what we see, but also I think, it's enabling, muni to also access, investors who are quite sophisticated when it comes to ESG where ESG is really high on their radar. And so for some of the Munis, I try to get some project, for example, social project, for example, funded Europe is a great place to do that, right, because, there's a lot of, European policies, social policies are really high on, European agenda. And so, topics like higher education, for example, funding, higher education funding, healthcare, even like climate on a sort of green stuff is something that is familiar for European investors, right? so not only there is a lot of project that can be funded perhaps more easily, but also, structures. There's also a lot of innovative structures that, European investors can offer. So, when we talk a lot of bad green bonds, but there's also the possibility to do social bond, sustainable bonds, which is both, social and green bond, but also we've seen transition bonds, for example, for, some of the gas, utilities companies that try to, move toward greener, assets. we've seen as well sustainability linked bond, which is on the rise because it's not really project based. So, the issue doesn't necessarily need to have, a list of project identified, but, the coupon that they will pay will be based on KPR that they need to achieve over time. So, it does give them a little bit more, flexibility, but also I think the third point is around disclosure and best practice, right? So, it's really sort of encouraging Munis to be quite disciplined with the way that they disclose and they, the green bonds. So, for example, having, making sure that they get into the habit of building a sustainability bond framework, for example, and, having that it's going to be aligned with certain, EU taxonomy or the Ikma, principles. So it, getting, it's like getting Munis to just start following best practice.
Lynne Funk (
Glen, we kind of talked before from your state, as an underwriter you've, seem to be more, I'll let you put your, to your own words. how do you fit into this? How, where do you see?
Glenn McGowan (
Well, I think that there's no question that all the major asset managers that we, work with and talk to on a daily basis either have created ESG investment vehicles are in the process of doing so, or at least talking about it. It, there's no question that that's a growing focus for the marketplace. And I think, the climate impact certainly is very obvious and very real you think about, the droughts and the wildfires in California, you think about, recent flooding in Dallas and situation in Jackson, water, either showing up where it shouldn't in size or not showing up at all where it should and you can understand the underlying push, behind, ESG projects, but, to Howard's point and also to ode's point, like we don't necessarily have a uniform set of issuance standards and it does sound like the European markets are well ahead of us in that regard. I think that would help to bring some uniformity to the construct of what an ESG bond is now at the, at the end of the day, I haven't seen too many municipal securities that really aren't in some fashion ES or G, right? What, what are we doing? We're raising capital for public education, for, water and sewer projects for low income housing, public goods and services that in some way, shape or form are ESG, but there's not a uniform set of standards as to how they're labeled and what the criteria should be. And, so I think at the end of the day between the, dispersion, if you will, or disparity of documentation and uniform standards, and the fact that we're just exiting a very low rate, tight credit spread environment, there really hasn't been an opportunity for much if any of a pricing differential that could change over time. But I also think that having some, proper standards would, would help that effort. So, we'll see where it goes, but just as many of the major money managers are scouring the globe looking for foreign assets, and we're seeing a lot of, deployment of those assets in the us muni market through many of the name brand money managers. The same is true in terms of their, focus on building ESG investment vehicles. So, more to come on that, but I think it's a good, it's a good conversation to be having in. And it's good to hear odds perspective on, a market that is probably well ahead of us in terms of the development of standards and documentation and, related issues.
Aude Rajonson (
Yeah, just to add, I think one of the things as well, where it's interesting for, U.S Muni to look at in Europe is around, net zero, strategy. So we know that, a lot of the Munis now starts thinking about it. And the great thing about Europe is we've from the exchange perspective, we've started building that market called voluntary carbon markets, which essentially is a market where, Munis can now start becoming investors onto that market. And by credit carbon credit that will help them offset some of their own emission and help them fast track their growth or their sort of net zero growth and commitment or over time. So, it's another way of supporting that, net zero commitment.
Lynne Funk (
I would like to pivot just for a couple, couple minutes here on, talking about broader investor base, talk about changing investor base in Munis. we know retail has, retail holdings have kind of declined, gradual decline over the years, this year particular, with the mass outflows of mutual funds, recently, well, the beginning of the year, it was more, you saw more ETF's seeing inflows. but SMA growth is kind of seeming to pop up. I don't know, Howard, would you be able to talk a little bit about the liquidity in what you're seeing out there in terms of how investors are, moving money around?
Howard Cure (
Right. So, I don't wanna get too bond wonkish, but the structure is important and you see a change in the coupons for 5% coupons, and it's sort of a way to hedge against inflation on that. So, where there have been problems are more when there were par bonds say for the housing sector, which really gets, and they have par bonds. So, the rates one, two, 3% rates, which is sort of echoed the market. And, then when interest rates really spiked up, they're the ones that showed the biggest paper loss. Not that there was anything, the housing market bonds, the single family, and multi-family have been doing very well from a credit point of view. It's just that structure. So, and so that's one aspect of it. And then during times, when you start getting concerned about credits, you may see variations in spreads between triple A and triple B type securities as well, where it could really widen out. And the less, if you you're seeing, as you mentioned, so declines from mutual funds and selloffs, well, what's get sold off, are usually stronger rated bonds, where there is a market. So you could see a widening of spreads between that because of that. So, I'll, also defer to Glen who lives it from a different perspective, but from, from our perspective, it's the liquidity issues for our clients on those bonds and what it means on the expectation of how it's structured for what you think about, the issues have inflation and then a recession.
Glenn McGowan (
Yeah, I guess what I might add is we're reminded in this volatile market environment, that we are a credit product that trades like a rates product, and that there's a lot of different vehicles, in which that, in which that's done, you've got, SMAs, you've got ladders and barbells, you've got open end funds, close end funds, ETFs, hedge fund product bank portfolio. So, there's a variety of different investment vehicles that are, deployed in our marketplace right now. The market is pretty heavily sold to be honest with you. And until we get some stability in rates, it's hard to see that changing. I do think perhaps the more resilient, approach has been, for SMAs to own actual bonds, where you're, you might see on your monthly statements, a paper loss, but you're still getting your semi-annual coupon. And if you hold that portfolio to maturity, you're not gonna see in most cases a default. But there has been quite a bit of trading activity around ETFs, in this market environment, if an ETF is trading, at a discount to its net asset value, there's quite a bit of arbitrage strategies around, the ETF fund or sponsor basically redeeming or, buying back shares. And the inverse is true when an ETF is trading at a premium to its nav, that they would, that they would be, issuing or creating shares. And so there's a, there's a, kind of a pattern of trading baskets of municipal bonds, around that dynamic. But, regardless I think the overwhelming trend right now is an end user in our marketplace, an end investor that is not accustomed to seeing the total return of a municipal bond portfolio being down 10% year over year. There's a Bloomberg article yesterday. That was very well written that, talked about the total return of the Bloomberg muni index being the lowest it's been the most negative it's been since 1981. That's you think about the sole purpose of many of these, investors in the marketplace it's stability and predictability of cash flows. It's earning that tax free coupon, which they will still earn, but there's a lot of noise now because of what the overall market's done. So, it's created, a lot of uncertainty, a lot of, variability and trading strategies. But I think at the end of the day, the market has become so macro driven, so fed, driven, and even the fed itself, doesn't have a strong handle on what it's, sort of future path of rates and policy look like. So, that filters down into the day to day rhetoric in the marketplace.
Howard Cure (
Let me, just add on ETFs. We deal with single managed, accounts, but, with ETFs, the benefit is that it's liquid more liquid than a mutual fund. You could trade it during the middle of the day. And so, but the lot of the underlying securities that comprise the ETF are not nearly as liquid as the overall concept of the ETF. So, when there's selling that needs to be done on that, you could have a real sort of mismatch on what's going on within those securities versus the liquidity aspect of it. So, it's just something that really you keep in mind, and I don't want plug, or services as much, but, just having that control on an individual basis, I mentioned you're clipping coupons. It may be a paper loss, but it's, you're still getting the expected, unless there's a default, which is still incredibly rare you're still getting that flow of income coming in.
Lynne Funk (
So we, a lot of folks said back in maybe July before we saw they we're predicting of a re a rebound in Munis. And so far that hasn't happened. there's, when you're talking about the losses that we're seeing so far this year, given their potential for more, a larger fed rate rate hikes, potential for recession, you can assume it's probably near impossible for the market to pair back most of 2022's losses. can we, can the, can the market make up some, some ground here? Like, what's, what's the outlook, if you can give it to me, for the next couple months.
Glenn McGowan (
My crystal ball is very badly cracked. I would, I would say that, yeah. Could it make up some ground? It, it can, we've underperformed treasuries, right? Like many asset classes, we've underperformed our, our hedge, we've seen interest rates rise and credit spreads widen. We've seen coupon differentials widen. So, we'd have to see some combination of those things or avert, but, we are very clearly embarking on the beginning of a recalibration of rates. What's interesting is if you had, if you would actually look at a 20 year, band across the yield curve of where our AAA benchmark is, what you would see is that, compared to the average of that 20 years, the first half of the yield curve is higher in yield right now than the average, the back half is right around the average. And actually in some places it's a little bit lower. So ,we're still in a historically low rate environment. It appears that we're rapidly exiting that environment. But, again, we need macro stability before we can really talk about outperformance, which I think is your question now, I know people in the audience are kind of looking at their watches, like, where are we with this whole? The four of us are actually the bartenders. So, just bear that in mind, there's no drinks until we're done here.
Howard Cure (
And then I'll be brief. The advantage in this type of environment of keeping your portfolio short, shorter maturities, where they'll peel off, and then you'll be able to reinvest at higher rates is something that, takes some discipline. Cause it's tempting. You think, well, these rates on the longer end are, are getting higher from years of being so artificially, not artificially low, but low, it's tempt, you need real discipline and you, and to be able to explain to your clients what's going on and the negative numbers, and if you're looking at it on a regular basis, it's fluctuating. And, and this is for a lot of wealthier people. This is their sort of going to sleep money where they don't want to have to worry about the fluctuation. So, you need that communication with them to make sure they understand what the strategy is on this. And just having kept the portfolio. Shorter duration has helped right now. And who knows what, when it's, the rates are gonna peak, but as of today, you're looking pretty good.
Lynne Funk (
Okay. Do you have any questions out in the audience for the panelist? Yeah.
(
No takers. We didn't think So, Well, thank you very much to the audience for being here. Thank you to our great panelists. Thanks again for being here. It's great to see your old person again and enjoy cocktail. Thanks for having us.