CARLSBAD, Calif. — With low volume and demand lacking in the face paltry yields, the municipal market must tackle structural problems, according to industry insiders at The Bond Buyer’s California Public Finance Conference.
“Bond flows are down and investors are really looking for some yield,” Andy Nakahata, a director at Citi, said in a panel discussion here. “The market will continue to innovate. It always has.”
The municipal market is facing rough waters following strong years that included the Build America Bond program, which ended last year. Now, things are different.
New borrowings in August tumbled to $21 billion, a 29% decline from the $29.7 billion issued a year earlier and 42% down from 2009, according to Thomson Reuters.
The 10-year municipal yield is just off its record low, the 30-year is hovering around its lowest level in three decades, and the two-year yield is at its lowest in 40 years.
“The municipal market is doing much better than a lot of other asset classes,” according to Timothy Romer, a managing director with Goldman, Sachs & Co. “But when you parse through it and open the hood up, there are some troubling issues as an industry we need to think about.”
Romer said the majority of volume has been stuck in the shorter term this year, with a lack of new-money sales. He said the long end is where the market will face challenges from structural imbalance if volume does grow.
Romer said issuers need to be more flexible, liquidity needs to increase, and more transparency is needed in the market to make it easier to understand the credits.
Romer raised the possibility of shorting in the municipal market as one potential way to increase liquidity.
The market must also address the federal government’s perception of tax-exempt bond interest, he said.
President Obama’s proposal this week to limit tax-exempt interest for high-income taxpayers is the latest sign of Washington’s skepticism of the tax-exempt bond market.
“Everyone is looking at our market and saying it is mispriced. The federal government thinks they are giving away money,” Romer said. “We have to address that as an industry.”
Going forward, Jaime Durando, managing director at RBC Capital Markets, said he still expects demand to ramp up from refunding sales in the short term due to low interest rates and in the long term because of pent-up demand for infrastructure.
“The natural need of municipal infrastructure across the country is a juggernaut in terms of how long we can hold off,” Durando said.
Even with the all the needs, he agreed issuers are going to have to get more flexible in what they want to do in the current market.
Debra Saunders, vice president at Fidelity Capital Markets, said more retail investors have taken up some of the slack in the market by returning to munis as part of a flight to quality.
She said the market is doing more to accommodate retail and more issuers are building brands to create familiarity with individual investors.
