- How much disclosure is enough?
- SMAs in particular are front-of-the-yield-curve focused. Do deal structures need to adapt?
- Is there a way to lure non-traditional investors into the space?
- The interest in high-yield has grown; how much risk can the investor base take on?
- How has automation aided in pricing and execution from both the buy-and sell-side?
Transcription:
Presenter (00:11):
Working, not working. Working. Okay, good. Alright, we're going to get started with our next panel, who is buying Munis Now our moderator, Phil, is going to get us started.
Phil Wright (00:26):
Good morning everyone. Good morning. My name is Phil Wright. I'm Head of Underwriting at TD Securities. Joining me on the panel today will be introduce yourselves.
Vikram Rai (00:37):
I'm Vikram Rai. I am the Head of Municipal Strategy as Wells Fargo.
Thomas Rasmussen (00:42):
Good morning. Tom Rasmussen, Head of Municipal Capital Markets at Cabrera Capital Securities.
Christopher Brigati (00:47):
Good morning. Chris Brigati, Strategic Development at S-W-B-C-C Bank.
Paige Litten (00:53):
Hi, good morning, Paige Litten. I'm a Director in Public Finance at Assured Guaranty.
Phil Wright (00:58):
Thank you guys. We're certainly in the midst of uncertainty in the market as far as fed funds goes and even further out the curve now with this recent move in rates, we 10 years have moved past 4% on up in two to four and a quarter. It's now starting to bleed into the municipal market and as of yesterday, we did see the biggest cut in the scale in two and a half years. So I think it's certainly a good time to get into the market and the ins and outs of who is buying municipal bonds. So let's find out, we'll go to Vikram first and then go to Chris after that. Vikram, what are the trends in open-end fund flows? Can we expect inflows now that key curves that reverted to their upward sloping shape?
Vikram Rai (01:37):
Thanks, and it's a complicated question because just one month ago I made this whole, I did this whole song and dance about how the up curve is upward sloping, so we should get a rash of flows into funds and my outlook has turned significantly pessimistic since, and it's because the curve hasn't behaved the way that it should have, especially after the jumbo cut that we witnessed after in September after the FMC. So normally you would expect that the curve would bolt steepen. It hasn't. It has bare flattened or bare steepen depending upon which curve we look at and see. My pessimism. It comes from mainly from economic incentives. So what drives flows, flows will be driven by consumer sentiment, by risk aversion and then economic incentives. So consumer sentiment, achen is generally positive. Look at retail, the retail data that came out, retail sales generally consumers seem to keep spending risk aversion is high risk aversion as it should be because we are entering a very critical few weeks regarding the election and people kind of know that depending upon the outcome.
(02:51):
For instance, if it's a Trump victory, it's very well transmitted that rates will be higher. So they rather avoid that volatility and move to the sidelines. So risk aversion is high. Now that comes from a third point economic incentives. So there is a tremendous amount of cash which is sitting on the sidelines, which is just waiting to be invested into longer term assets. But think of the math here, it's not even math, it's arithmetic. You have money funds which are still able to offer anything from four to 5%. The bank deposit rate, the blended rate is around 3, 4%. So in that vein, you think about what the longer term muni fund is offering, it's a lower rate, so what is the incentive for an investor to move cash off the sidelines and put it into muni bonds? That incentive has diminished because of the upward rate move.
(03:48):
Now the longer term outlook, like I said, I'm a little pessimistic because if you look at just the consensus forecast or the Fed funds rate, now the expectation is that we will reach the 3.5% mark in late September. That is when the math will make sense. So that's why I would say that I think we would be lucky if fund flows stay positive, they could turn negative and we all know that if you get a red wave or a Trump victory expectation is that rates will sell off by 25 to 50 basis points that that will not be good for fund flows.
Phil Wright (04:25):
Great, thank you Vikram. Chris, your thoughts?
Christopher Brigati (04:28):
Yeah, pretty much everything he said is that on accurate? So I don't have much to add with that except the reality of I think down the road, once the Fed does get into the rate cutting cycle, we will see that opportunity, the curve is going to steepen again. A bulk steeper should happen at some point down the road. The question is when we've had fits and starts so far in that regard through the summer up until now, and it looks like it's backtracking a little bit, but I expect a year from now to be in a slightly different position, those short-term rates to be less attractive than they are now and therefore that money should be coming off the sideline record amount of money being held in mutual fund, short-term mutual funds, and on the very front end of the curve, regardless of product is probably going to start looking for a home soon. And that soon is a question of when and we really need the Fed to be forthcoming with regard to when that could happen and that's going to drive that boat.
Phil Wright (05:24):
Great, thank you Chris. Moving on to the next, what about SMAs? We'll head into that. Are we cannibalizing flows from open-end funds? Tom, we'll start with you.
Thomas Rasmussen (05:33):
Sure, thank you. SMAs come in a variety of different forms at this point. Certainly there are passive SMA programs are active SMA programs and there are basically investment strategies being tailored to individual retail investors in that category. I think in that sense, SMAs have attracted a lot of the additional assets into the muni market. I think they're going to continue to do so. Most of the activity we see is generally inside of 15 years, but when you start to look at some of the larger asset managers, they're actually looking across the curve, sort of actively managing those accounts as opposed to doing what was historically a laddered portfolio. I think certainly when we look in that 15 years and in we start to look at ratios on the curve, we start to see that that's really where the SMAs are playing. They tend to be high grade in nature, however, we're starting to see a few of them more actively managed programs go down the credit spectrum as well. So yes, I do believe that they will continue to draw assets away from the mutual fund complex from the bond funds themselves.
Phil Wright (06:36):
Great. Thank you. Tom. Vikram, back to you for on this.
Vikram Rai (06:39):
Yeah, sorry, the light is very bright and I had light sensitivity. So the SMA growth, as Tom rightly said, has been profound. Now I confess I don't understand the reasoning behind it because the idea is very seductive that I have a guy who manages, it's customized, but we all know that the SMAs are more or less similarly staff versus open-end funds. So to be able to offer a customized portfolio to thousands of clients is not really possible. Now I like the idea though. So I am of the opinion that a large money manager should offer every product because ultimately we are catering to the retail base. We are catering to households, we are catering to retail, and whether they want to invest in Munis via open funds or SMEs or ETFs, it doesn't matter. The product has to be there. So I think we would be very myopic for a large money manager to say that no, we only do funds, we only do SMAs, we only do ETFs.
(07:43):
No offer whatever is needed to meet the client's needs. Now I have some disagreement with the Russian industry with respect to the size of aggregate SMA assets. Now see overall the muni market is 4 trillion in size, the size of direct retail, well retail is about 1.6 trillion and that includes SMA. So the numbers that I see being band aid around at SMA AUM is 1.5 trillion. 1.6 trillion is simply not true because we know that a lot of the retail buyers directly too, so SMA AUM is the aggregate is probably about 800 billion. And the reports that you see, they end up double counting a lot of the SMA. So meaning that one fund will be the manager and then they'll outsource it, that gets counted twice and that's why the numbers double counted. Now, I don't subscribe to the notion that SMAs will actively cannibalize money away from open-end funds because like I said, the value add is nimble at best customization. If that's the only thing they offer, then I don't think it's truly customizable. But I like the idea of SMAs. I think they should change their investment mandate, make it a little more diverse, extend out the curve, buy things like prepaid gas, housing bonds, et cetera, because they have become very sophisticated. But I do believe that SMA assets and open and fund assets will grow hand in hand.
(09:19):
ETFs is another story, but I know we'll discuss that later.
Thomas Rasmussen (09:22):
Yeah, can I just add one more thing to RA's comments was I completely agree with this diversification and suite of offerings across investment managers, and I'm sure we're going to get to that as you said. But in terms of ETFs separately managed accounts, funds, opportunity funds, et cetera. I mean when you come onto a large platform, you have to be able to offer all of those products to that Salesforce, whatever that brokerage Salesforce looks like, and that's the way everyone's moving at this point.
Phil Wright (09:47):
Great, thank you Tom. So with all the SMA demand in the market right now, Chris, do you feel as though there's potential to impact both yield and spread curves?
Christopher Brigati (09:56):
I do, and I think when you look at the SMA audience, what they tend to buy is down the curve a little bit. And so the amount of money that has been going into the short to intermediate portion of the curve has the opportunity and the ability to drive spreads a little tighter there. And I think that can influence the shape of the curve in the municipal space definitively it's a matter of is there enough other alternatives for investors to be able to partake in outside of those parts of the curve. And so I think the differentiating factor is going to be when and where does their money come in, how does it come in? And when you're looking at the opportunity for investors, particularly in SMAs, I'm finding that they're starting to do more different things than they've traditionally done. Traditionally, we've seen a lot of short call type of paper going into SMAs now they're looking to be a little bit bigger in size, so it's not as odd lotty as it might've been in the past. And that creates opportunity for the dealer side of the community to kind of present different services to them to get into different portions of the market, new issues. For example, I'm seeing more and more SMA putting in orders on new issues and getting pretty solid allocations. So we're seeing very strong representation when those monies are coming into those types of accounts.
Phil Wright (11:11):
Great, thank you Chris. Tom, A few thoughts on that.
Thomas Rasmussen (11:15):
I'm sorry.
Phil Wright (11:15):
Do you have a few thoughts on the,
Thomas Rasmussen (11:17):
Just in terms of where they're buying on the curve? Yeah, I mean I think the point is that they're becoming more flexible, becoming more fluid. We're seeing programs where they're coming way down the curve and putting lots of cash to work across their accounts. We're seeing 'em come out to curve. We're seeing 'em come into the, like I said earlier, out to credit or down the credit spectrum to pick up some additional yield for their clients and just continue to be a driving force on all of these transactions.
Phil Wright (11:45):
There can be a couple thoughts.
Vikram Rai (11:46):
Yeah, I agree completely what Chris said. The impact of the SMAs on buying patterns is profound because they have a very large footprint now equals that of open-end funds and their mandates are more restrictive like Tom said. So they like the five to 70 part of the curve. That's why the five year ratio is always so rich. Now the returns hadn't been that good when the curve was sharply upward sloping, but now in an inverted curve environment, returns have improved. Now I would encourage them, and like I said, they buy the traditional sectors, they won't buy prepaid gas, they won't buy housing bonds, anything with a structure, even though there's value there. So I would really encourage them given that they are so sophisticated now, I would encourage them to step up the curve and see this is one of the greatest paradoxes of the fixed income market that you have the muni world, right?
(12:42):
The tens 30 treasury curve is 25 basis points. The tens 30 muni curve is 90 basis points and it's callable. So effectively you are able to pick up an extra 90 basis points and not really increase a duration because it's a callable curve and those bonds will get called at 10 years. So duration impact doesn't change, but you have yield pickup. So it bogles my mind why SMA given all the sophistication, given all their intelligence, they don't step out the curb and pick up that external 1890 basis points. And that's why their impact on buying patterns is, like I said, profound because that's why the front-end ratios are rich. That's why the long end ratios are cheap.
Phil Wright (13:24):
Great, thank you. Vikram. As you mentioned, let's move now on to ETFs and we'll start with Tom here. Tom, what trends are we seeing in this space? Will we continue to see explosive growth and is there a potential for growth of active ETFs?
Thomas Rasmussen (13:39):
Sure. To my earlier point, I think what we're finding is that a lot of the investment managers want to have this whole suite of products to offer out to the investing community, and that's being encouraged by their senior management as well as the portfolio managers themselves. But as Vikram said, it's really in response to lower cost product offerings. I think when we think about the credit quality of municipals and we think about what really has to be done in terms of having sort of national ETF funds or state specific ETF funds or even specific products, the actual need for really active management is probably not there. We are, however, we're seeing additional ETFs that are focused, say in the high yield market, focused on specific sort of opportunities in the market. So I do believe there'll be continued diversification within the ETF offerings.
(14:35):
I think from a investment manager point of view, the spreads, the management fees are still quite low. But I think that the product itself, given that it's been in the market for what's called close to 20 years now, has gained widespread acceptance and it's something that the retail brokers can continue to move. I know at Citigroup, three of us here all started at Citigroup or worked at Citigroup for a number of years as colleagues, one with one exception. This is sort of a reunion for us as it is often among the Citi grippers. We received funding a number of the ETFs years ago and with the anticipation that it would take off from a retail and possibly an institutional point of view as well. So I think we're seeing that fruition now and even though some of the investment managers may not like it, because again, it's a low spread product for them to market is something that the investing community wants.
Phil Wright (15:22):
Great, thank you. Tom. I know Vikram has some thoughts on this too.
Vikram Rai (15:25):
On ETFs. Yeah, sure. So some of you may know last year I got fired and when city group shut down its community division and it was very stressful to stay at home with my three kids, my wife, my dog. So I was actively looking for a job and I interviewed with a lot of shops and I didn't get a lot of the jobs because I think they didn't agree with my views. But like Tom said, the high yield market, I mean some of the jobs that interviewed for with the high yield funds, now the high yield market in our world is shrinking. It's shrinking because there's not enough supply and there's too much demand. Everybody wants the yield pickup. So if you are basing an entire career off of that, it's a tricky market and I don't envy the high yield manager job because just to pick up a few extra basis points you can blow your finger off.
(16:13):
And our market, because the high yield market is shrinking, it is becoming more of a high grade market. So if it's becoming a more of a high grade market, if liquidity is improving, albeit but not that much. ETFs do make sense because we see, we are seeing over and over again that you don't need that much active performance. The performance comes from directionality. Yesterday we saw 15 basis points cut and that's coming because there is stress in the treasury market. So ETFs make sense that vehicle makes sense. Investors want taxes and income and at the same time they want high grade, they don't want to worry about credit. So ETFs, we will see explosive growth. The footprint of ETFs in the corporate market is 6%. 6% of all corporate holdings are in ETFs. Currently we are at 3%. I expect that we will move in that direction, we'll be achieved 6%, maybe not, but even four point a half matters. And if you look at fund flows so far, right year to date fund flows, open-end fund flows have been 22 billion. ETF flows have been 9 billion. The footprint of the ETF world is much smaller than open-end funds. That means they're punching above the weight glass. That means they're more popular than open-end funds. So it would be myopic for any large money fund management not to offer the ETF products. We will see growth there.
Phil Wright (17:34):
Great, thank you very much. Let's move on to a little bit of a different topic as far as buyers. How about bank demand? What is the outlook for the coming year for the banks and their buying power? Tom, we'll start with you then head to page.
Thomas Rasmussen (17:47):
My experience with the banks have been tax exemption in general has not been attractive for them over the past several years. Some of those are accounting charges, some of 'em are just regulatory issues there. What we have seen recently is some banks coming in primarily on taxable municipals where there's still an attractive yield for them there as well as some general obligation paper where the regulatory treatment or the tax treatment is favorable. That being said, I think unless we see a significant backup in ratios or increase in ratios, have some sort of dislocation in the marketplace, it could be some other type of tax reform and so forth. I don't expect banks to be significant players.
Phil Wright (18:34):
Fair enough. Paige, your thoughts?
Paige Litten (18:36):
Yeah, sure. Thank you. So in terms of bank demands in the insured space specifically, bank demand does continue to be pretty strong for insured paper, whether that's for taxable deals or tax exempt geo paper, like Tom mentioned, one of the primary reasons that banks do typically look for insured paper is to either get better credit treatment on portfolios or to enhance liquidity on positions that they want to monetize and sell. What we've seen really post covid is that liquidity continues to be a very, very important theme in the market. There's still a lot of uncertainty out there. I think right now everybody's certainly focused on the upcoming election, but even as the election moves behind us, there's going to continue to be uncertainty in the market, whether it's uncertainty related to inflation, the state of the economy as it relates to the Fed's hiking cycle or geopolitical uncertainty, whatever it may be that's going to continue. So liquidity is going to continue to be important in the market and as banks and really other buyers as well continue to look for increased liquidity insured paper will continue to be in vogue as well.
Phil Wright (19:44):
Great. Thank you. Paige, finish up the bank demand. Let's go on to insurance companies. Do we see PNCs likely to keep buying municipals and also do we think the increased frequency of natural disasters will impact demand? Chris, we'll start with you.
Christopher Brigati (19:58):
Sure, thank you. When I'm looking at insurance companies and their buying patterns, they've definitely taken a backseat in recent years and they've pared back their participation, not unlike what banks have done and the reasons are several fold, it's a matter of the liquidity. As page had mentioned, liquidity is very, very important in the market and you have liquidity until you don't and when you need it, you can't get it. And that's a problem for places like insurance companies. So when there is something that creates that need for demand for liquidity and you can't get it, it paints you in a little bit of a tight corner. And that's very difficult for any investor, but especially insurance companies because many times those events are natural disasters, things like that, that require them to seek the liquidity that they want. And when it's unavailable for any reason, that becomes a problem.
(20:45):
So I don't expect there to be an increase in investor demand from the insurance company side of the equation. I did have a very interesting conversation with a client last week. Local Texas municipality had asked me to try and make sure we were able to help them get access to a particular insurance company. The insurance company just is not buying their paper. There's several reasons behind it, credit related, not that it's a terrible credit, but it just didn't fit the profile that the insurance company wanted. The funny thing about it was the CFO does not live within the confines of the issuer's municipality. And I kind of pointed that out to him and he said, well, yeah, it's kind of a tougher area. I said, well, why are you asking me to help you get an insurance company to buy your bonds when you won't even live there? He didn't have a good answer for that one. So I let that go. But it was kind of telling that the insurance companies are also very mindful of the credit aspect of the issuers and they're being thoughtful about that to maybe a tighter degree than they otherwise would've been.
Phil Wright (21:50):
Great, thank you. Tom, your thoughts?
Thomas Rasmussen (21:53):
Yeah, it's really interesting. I was able to talk to a couple of folks on the property and casualty side recently and back in 2018, the tax rate changed for their treatment of tax attempt income. And since 2018, they've generally been reducing the size of their municipal portfolio. So when you look across the industry, it's tended to be between 25 to 50% of their holdings at this point. So they have become, I think more opportunistic in terms of their investment, but then just overall moving into taxables and into corporates in particular, a couple of other observations around the PNC business is that they have a hard time dealing with call provisions. So given how rich ratios are down the curve, so inside of 10 years, it's just not attractive for them to get involved inside of 10 years and then out the curve, they have a hard time accounting for the tolerability of the paper. I think again, if there was an increase in the amount of taxable municipals available in the marketplace, you would certainly see them come back into the market assuming yields were competitive, but they could get in the Corbett market. But yeah, generally just continuing to reduce their overall portfolio and just optionally coming into market when something arises.
Christopher Brigati (23:06):
If I may add that we've been in the 72 to 67% 10 year ratio for quite a while now. If that popped up to 90%, I think we'd see a little bit of different participation from many types of buyers, and I think insurance companies would probably start to reevaluate because the benefit of that extra yield might be helpful to them on a relative basis versus other products. So those are some of the factors that have been kind of suppressing demand there as well I think.
Phil Wright (23:32):
Speaking of relative basis, that's a good segue. So Vikram, what do you think about foreign buyers going forward? Are they buying more Munis or less?
Vikram Rai (23:40):
I just have nothing good to add, meaning that nothing optimistic to add. I think so. So by foreign buyers are concerned. The last panel on climate risk, I have to say I like the idea, I disagree with the marketing. Munis are the original ESG compliant asset class are CPAC adequate ESG investment because we build hospitals, we build bridges, we burn tunnels, we build schools. It's not all about climate change. It's not all about climate risk. And see, what I was trying, I keep trying to say is that we miss the boat because we are so disunited as our community is so disunited foreign buyers, what we should have done, there was a point of time five years ago, in fact, three years ago when the G 10 sovereign yields were negative then negative or in the low single digits, muni rates were higher and they would've gladly invested in a high grade product, which is ESG compliant.
(24:47):
We just didn't market it properly. So it doesn't have to be hysterical crusade about climate change. I'm not a tree hugger, but I do believe that climate change is real. Yes. Now do I agree with the statistic that in higher climbs the grades decline? No, they don't. My student grades don't decline higher climbs. I know I was born in India and they'll make sure that your grades are high enough and they'll give you an AC to go with it. It's not that. So now when this environment, when G 10 sovereign rates are higher, right, the incentive to come and buy Munis has diminished. And that can still change if you market it properly because like I said, with the original ESG investment, right, and foreign buyers have large balance sheets. They want to invest in American infrastructure because we are the vortex, we are the magnet for cash.
(25:39):
So all the money is flowing into US dollar normal assets. I am very dispirited to see that most of it mean none of it is really flowing into Munis and like Tom said, that they can buy taxable Munis, but that has to make sense on a total return basis. Taxable Munis, given that issuance is so anemic, less than 50 billion, it makes more sense for foreign buyers to buy corporate. So we just need to market it properly and whether it's a red state or a blue state, slap the ESG monitoring to it, certify it properly so that you can't be accused of greenwashing and marketed to foreign buyers. That's when our buyer base will grow.
Phil Wright (26:21):
Great, thank you Vikram. Tom, your thoughts on this?
Thomas Rasmussen (26:24):
Sure. So Vikram and I had the honor so to speak, of taking Munis Global during our days at Citigroup. So certainly during the Babs era we were selling a lot of municipal product, a lot of municipal risk overseas. We were coming up with different types of derivative products that could allow for inexpensive or somewhat tax advantage financing for the foreign buyer because again, how were we able to transfer some of that tax advantage to the international investor as opposed to the domestic investor? It's a tough slog. I think it is hard to bring people into the universe of investing in Munis. It took us several years. We were successful in doing so and we had offices in London and also in Hong Kong at that point. We were selling a ton of bonds.
(27:11):
I think the impediment at this point, I mean to Vikram's point is we don't have a lot of people marketing internationally right now. So if there is an opportunity, it's probably difficult to get it out and present it to foreign investors or international investors. There are a number of money managers that have big corporate portfolios at this point representing international investors on the sovereign wealth side, but also insurance company side. So they're in a good position to take advantage of some of those opportunities. But I think in general, Vikram, the marketplace just can't respond quickly enough. There's just a lag and there's different types of regulatory considerations around selling municipals internationally and trading them and so forth. It's difficult. It's challenging in a prolonged period of high issuance of say, taxables, it was an opportunity to shift that risk or make that opportunity available to foreign investors and they took advantage of that and they certainly do have a positive view on high grade municipals in general, but right now it's just difficult to market quickly or come up with the structures that help them receive some of the tax advantage of that US investors currently receive.
Vikram Rai (28:19):
And to add to times point, see the foreign buyers, they need to hedge their dollar exposure. So when rate volatility is high, that's about a hundred base point cost. So if you're buying a taxable muni and then paying up a hundred base point to hedge it, then the taxable muni doesn't make sense. And that goes back to my earlier point that if it's marketed as ESG, if the buyer is willing to accept a slightly lower yield because it's ESG compliant, then that makes sense. ESG again is a very complicated topic, right? I have marketed clients who don't want to buy Texas paper because they don't like gun policy and I want to say, okay, that's the silliest thing I've heard. Now I've got thrown out of meetings because I tried to sell them tobacco bonds because the tobacco bonds, but most of Munis is we are building hospitals. Like I said, we are building roads, bridges, infrastructure, schools. There should be, there's no political color there, there's no political leaning there. We are doing a world of good. Like I said to Tom's point, we market it properly and then there's opportunity there.
Phil Wright (29:26):
Well put. Thank you. I know Paige had mentioned on insurance a little few minutes ago. Let's go back to that. So Paige, what are you seeing? When are you seeing the best demand for insured bonds and who are the typical buyers for these bonds right now?
Paige Litten (29:39):
Yep, sure, thank you. So in terms of what we see in the buying segment for insured bonds specifically, we really do see pretty broad based participation across all different buyer segments. So of course a very big sector of it is retail. Retail demand is very strong for insurance, primarily for credit protection and also ongoing credit monitoring. Then you have mutual funds that look for insured bonds for a number of reasons, whether it's enhanced liquidity as we talked about, tax swapping ratings, arbitrage, relative value play trading accounts as well. For all of those reasons with the exception of tax swapping insurance companies looking for better capital treatment and then banks as we talked about previously. So really kind of a broad base of buyers all for different motivation looking for insured paper. In terms of when we see the best demand, it really is across the rating spectrum and across many different sectors.
(30:38):
What I've found in talking to many different players in the market since being in this role is that sometimes different players think of insured bonds as really just a credit enhancement, which of course credit enhancement is a very large part of what we do and it's a big part of ensuring municipals, but it's also a financing tool. My background previously before being in this role is I was on the syndicate desk at Citi for a number of years, and one of the things that we always talked about on the syndicate desk was helping an issuer achieve best execution. And of course every issuer wants the lowest possible borrowing cost to do that. There are many different kind of tools in the toolkit, so to speak. Of course, you can lower yields through an order period. There are different coupon structures you can play with different call features, et cetera.
(31:29):
And really insurance should be thought of in a similar vein as that, which is a tool that can help an issuer lower their borrowing costs and achieve best execution. What we've seen is that even if an entire deal is not wrapped with insurance, using insurance does benefit the whole deal. Often as it creates diversification in a deal can create some pricing tension and leverage and ultimately benefit the entire transaction. So we've seen it be very useful from that aspect and what we've seen is consistently all of these buyers that we've been talking about so far this morning have consistently showed up in a big way.
Phil Wright (32:07):
That's great, Paige, thank you. Tom, your thoughts?
Thomas Rasmussen (32:12):
I think that insurance really does help. On the liquidity front, I think that it is super helpful to retail investors and I believe there's a number of mutual fund complexes that have grasped that concept and pursue the insured market very aggressively. I think that the mistake that was made years ago, and certainly I shouldn't maybe necessarily the mistake, but oversight that was made is it's not really it's credit enhancement as opposed to credit substitution. So when we were doing a lot of international marketing and a lot of other types of products that were related to a AAA rating based on insurance, clearly in an extremely stressed marketplace, there was a lot of pressure on that and certainly that did lead to some dislocations in the market. But I think the way investors are viewing insurance today is much more accurate with how it was designed. Really it does its enhancement, it does increase liquidity, it does increase market access, and I think that's the proper role for it as opposed to credit substitution.
Phil Wright (33:18):
Great. Thank you. Chris, you have?
Christopher Brigati (33:20):
Yeah, I did want to add something and Paige did not pay me to say this, but I will take a drink later on. I think one of the things that I've seen from an issuer's perspective, so this is a message to our issuing friends in the audience, is if you're entertaining the need for insurance, not that you have to do it, but it helps if you start that process as early in the discovery process as possible of bringing a deal to market. It just helps the flow of the decision making as well. If you put all the cards on the table of possible alternatives, you may entertain because the ability for the insurance companies to be on their front foot to help you in that regard is important. I've seen a deal or two where the insurance has kind of come up as an afterthought very late in the game, and it has been put some deals in jeopardy of coming to market and it has affected liquidity ultimately and their ultimate price. I think because it was slapped on at the very end. So earlier in the process you can engage your FA or other entities in that discussion is helpful.
Phil Wright (34:16):
Great, thank you. Chris and Vikram, let's get some thoughts from you on this. Are there certain sectors of the market where you see more demand for insurance paper?
Vikram Rai (34:25):
No, I think my panelists put it very eloquently mean. So this goes against my call that we are slowly transforming into a more high grade market versus a high yield market. And high yield is that is the paper that needs to be wrapped, but I think AGM BAM for instance, I mean they have very strong balance sheets and they have managed a portfolio very effectively. So that is why they're able to offer credit enhancement, credit enhancement, liquidity. So I see a market for insured paper, will it grow explosively? Well, that depends on how the insurers manage their portfolios and maintain their ratings because otherwise it won't make sense. It won't be able to wrap paper which is rated higher than you. But in terms of sectors, I think the most demand comes from GOs because that's a very liquid sector and that's generally the slightly lowered credits. The wrap helps with the liquidity.
Phil Wright (35:24):
Thank you Vikram, Paige, and closing thoughts on insurance there?
Paige Litten (35:27):
Sure, thank you. So typically when people think about what bonds is insurance used on, people go right to high yield, it makes the most sense just in terms of that credit enhancement aspect. At assured we actually wrap a number of bonds. We actually wrap some higher rated bonds, AA rated geo bonds, all the way down to triple B category healthcare and infrastructure credits. We are seeing really good demand for that kind of across the credit spectrum. Again for different reasons, whether it's for strictly that credit enhancement aspect or putting out a more liquid structure that perhaps appeals to a different buyer base. Getting back to what you mentioned, Chris, I think one of the frustrations that we all probably have within the muni market is that accessing and compiling data and comps can be a very, very manual process.
(36:26):
We at assured, and I'm sure our competitor as well does track the insured market very closely. And having been on the underwriting side before, I understand that syndicate tasks and deal teams may not necessarily be looking at every single insured deal in the market as closely as I am now being on the insured side of the business. So we do love to be involved in the conversation as early as possible. I think that's a really, really big thing. Number one, just so that insurance, if it is being considered, can be put out to the buying base very early, but also we can help with that decision and help provide that data, help provide those comps and texture around different deals that we've been involved in the market that can really help that deal team make the decision as to whether to wrap a deal. And ultimately if the economics do work and it helps the team achieve the lowest possible borrowing costs, then it's a win for everybody.
Phil Wright (37:21):
Great. Thank you Paige. Panel any closing thoughts before we go to our quick fire questions here?
Vikram Rai (37:28):
I'd like to add a statistic that I find very compelling and I think all of you can remember it. So we are talking about who's buying Munis and like I said, I find the successive way compelling, John Munis about 10 years ago, and I snapshot everything from after 2010, who are buyers. Our buyers are mainly household households. In 2010, the aggregate balance sheet of US households was 52 trillion day. The aggregate balance sheet of US households is 125 trillion. It has gone up one and a half times now. The size of the muni market in 2010 was 4 trillion. It is still 4 trillion. So that means a lot of things. That also means that we have underfunded infrastructure, but in the meantime, in this period, the treasury market has doubled, the corporate market has doubled, the mortgage market has increased by 50%, but our muni market is the same, the size is static.
(38:33):
So what I'm trying to say is that the demand supply equation is skewed very heavily in the favor of demand. There will never be enough supply to meet the demand because there'll always be investors who will be chasing tax income, right? I mean, we understand our deficit, we understand the policy politics, we know that tax rates will remain highs unlikely that they'll drop significantly. The federal tax rate goes up and down, but the state tax rate generally moves in only one direction upward. So what I'm trying to say is the direction of travel is clear. There'll always be enough demand for Munis. It's just that the buying pattern for buyers has to manage well because there's this tremendous seasonality. But that comes in Munis and it's not just that many investors still have, they believe the 60 40 portfolio, right? So if you started with a 60 40 portfolio in 2010 today because of the equity rally, the portfolio with the 90 10 equities, 90% equities, 10% corporate bonds, and if it was Munis, it'll be 93%, 93% equities and 7% muni bonds.
(39:38):
So even a mild rebalancing of the 60 40 portfolio will send a slew of cash into Munis. So that's so saying that the demand will always over and supply unless supply picks up dramatically. So I'm not worried about the longer term trend. I'm worry about the fact that a buyer base is contrary to retail and retail can be very fickle. We freak out easily. So I would've wanted more, like Tom said, an institutional buyer base and Chris talked about insurance companies, insurance companies, the fact that they're not buying is disconcerting and the math doesn't make sense to them. Banks, same thing. Foreign buyers aren't buying. So it's all retail centric, right? So that'll add to the volatility in the market. It'll add to the volatility in buying patterns. But in the longer term, there is no doubt that there's plenty of demand for Munis and just not enough supply.
Phil Wright (40:32):
Great, thank you Vikram. So we have a couple of quick fire questions to throw at our panel. We'll start down a page and just go right down the line here. First one, US treasuries 10 years. Do we see 350 or 450 first?
Paige Litten (40:43):
I'm going to say 450.
Christopher Brigati (40:45):
I concur and agree.
Phil Wright (40:48):
450
Vikram Rai (40:50):
Be at 425. This is an easy answer. See there's a political connotation here, but if you see a red wave or a Trump victory, the expectation is that the back of the annual calculation tells me that we will see the curve move upwards by about 25 to 50 basis points. So I think the 450 or even the 5% is likely
Phil Wright (41:20):
5%. Interesting. Okay. Alright. What about this muni supply for 2025 Paige?
Paige Litten (41:28):
A number or just the up or down?
Phil Wright (41:29):
Just a number. Just a number.
Paige Litten (41:31):
525.
Phil Wright (41:32):
Okay. 550. The price is right.
Thomas Rasmussen (41:38):
Yeah, yeah. No, we really don't want to be the consensus, but I mean I think we're in the consensus. Probably on 500.
Vikram Rai (41:46):
I haven't published my number.
Phil Wright (41:48):
Okay, fair enough. Fair enough.
Vikram Rai (41:49):
November 18th is when I published my number, so then I can.
Phil Wright (41:52):
Fair enough. Okay. What about the better performer in 2025? High yield or investment grade H?
Paige Litten (42:00):
I'm going to say I'll go high yield.
Phil Wright (42:03):
Okay.
Christopher Brigati (42:04):
I'm leaning towards investment grade simply because the significant performance of high yield this year. So kind of a reversion to the mean type of theory?
Vikram Rai (42:13):
Yeah, no, I think high yield and it's total ably high yield. It's just that higher coupons.
Phil Wright (42:19):
Fair enough. What about the 30 year spot? MMD or BVAL? Either one on December 31st. Right now we're right around a 390
Paige Litten (42:26):
375.
Christopher Brigati (42:30):
410.
Phil Wright (42:33):
Yeah,
Christopher Brigati (42:33):
Wishful thinking too.
Thomas Rasmussen (42:34):
Yeah. Yeah, I think 4%.
Phil Wright (42:39):
So this is the absolute, just the long end 30 year MMD spot or be a, whichever one you look at.
Vikram Rai (42:44):
See, it'll depend on the 30 year rate. So I'm going to say the ratio, I think the ratio will be about early eighties.
Phil Wright (42:51):
Okay. Fair enough. Last question. World Series Yankees or Dodgers?
Paige Litten (42:56):
I live in New York, so I have to say Yankees.
Christopher Brigati (42:59):
Go bombers?
Vikram Rai (43:01):
Yeah, Yankees. Yankees.
Phil Wright (43:03):
We have a consensus. That's the first time in the panel here. Well, that concludes who's by Munis panel. Do we have time for questions or are there any questions out there right now? I can't see really anything. Is it? No, I don't see any. Okay. Well thank you very much everyone for coming.