Municipal-bond yields at the highest in more than a decade are spurring optimism on the part of investment managers, who have been dealing with persistent fund outflows this year as the market has struggled along with the rest of fixed income.
The muni market is on track for a second straight year of declines, punished by the Federal Reserve’s interest-rate increases and its message that it intends to keep borrowing costs higher for longer to tame inflation.
Yields have surged across the bond universe, with one measure of rates rising to levels last seen in 2009. For market participants speaking on a Bloomberg muni-market panel Monday evening in New York, the selloff may have reached a point where demand will re-emerge.
“We are finally at levels where people want to buy things,” Catherine Crews co-head of municipal syndication at RBC Capital Markets, said on the panel.
Fellow panelists Alex Petrone, who is director of fixed income at Rockefeller Asset Management, and Chuck Peck, head of the municipal products group at Wells Fargo & Co., discussed today’s rate environment and how it’s opened up new challenges with issuance sinking from last year.
In the following Q&A, edited for clarity and brevity, the panelists share their takeaways from 2023 and discuss what next year may bring.
How are rising rates affecting business?
Yields on Treasuries and munis have reached a point where people are ready to buy, RBC’s Crews said. But from the issuer’s perspective, borrowing is growing more costly, which will depress bond sales.
“It has gotten a lot more interesting in terms of where investors actually want to buy things,” Crews said. “We are finally back at levels where investors want to execute and I think it’s going to, in the near term, be a little easier to get deals sold.”
While yields may finally be appealing, Petrone at Rockefeller Asset Management pointed out that “it was really uncomfortable getting here.”
And with the market headed for another losing year, “we really find ourselves in a continuation of this period of market dislocation post-Covid,” said Peck at Wells Fargo.
The panelists generally expected supply next year to be either lower or around this year’s volume, given where interest rates are.
What’s the impact of the declining number of dealers?
Panelists also discussed how the shrinking number of underwriters, which Petrone called a long-term trend, is influencing the marketplace and trading.
“You have elevated rate volatility, which is very hard to hedge normally, but in the swings that we have had right now, even harder to hedge, and then you see the dealer community pull further back from being long risk, which just makes it that more challenging to transact in the secondary,” Petrone said.
Are there any bright spots from a banking perspective?
“It's kind of funny when you talk about distressing situations as bright spots,” said Crews, who brought up health care as having potential.
“I think what you’re going to see both in health care and in higher-ed too going forward, is a lot more of either the bigger systems or the not-for-profits buying for-profits, buying these distressed assets,” Crews said.
Peck also expects to see opportunities in health care.
“We think of health care as a defensive sector in the sense that it’s sort of made it through the worst part,” Peck said.
Are there any emerging trends?
“I do think algo-trading is particularly productive and helpful in facilitating some of the liquidity needs, given the liquidity challenges that we’ve discussed,” Petrone said. “So as we continue to evolve from here, it will be interesting to see how much it can support” separately managed accounts, known as SMAs, as well as retail brokerage accounts.
Peck agreed that technology is key.
“Our most successful sort of business venture recently has been an expansion into taxable electronic trading in the odd-lots space marketed to retail and SMA investors,” he said. “It’s been a success, and one we’re going to continue to invest in.”
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