Securities and Exchange Commission member Dan Gallagher on Thursday tried to explain his recent warning that retail bondholders in the muni market, already wary their municipal securities may not have priority in a bankruptcy proceeding, are likely to face an Armageddon if interest rates rise.
Gallagher issued the warning on Tuesday at an SEC roundtable on municipal and other fixed-income securities.
Asked for an explanation by CNBC reporters on Thursday, Gallagher said, “I’m not trying to get people to run for the exits. I just want them to be educated about this.”
A lot of people don’t realize that there are about $3.7 trillion of municipal securities outstanding in the market, he said.
Individual, or retail, investors hold as much as 75% of these outstanding municipal securities both directly and indirectly, through mutual funds, money market funds, and closed-end funds, according to the Report on the Municipal Securities Market that the SEC issued last July.
Gallagher explained that if interest rates begin rising again, as they inevitably will at some point, investors holding bonds with low interest rates will see the value of their bonds drop and it could be more expensive to sell them as rates are rising.
However, the muni market is known as primarily being a “buy and hold” market for retail investors, and most investors would not suffer if they held onto the bonds until interest rates began falling again.
Gallagher said investors should go the Financial Industry Regulatory Authority’s website and read an investor alert that FINRA recently published: “Duration — What an Interest Rate Hike Could Do to Your Bond Portfolio.”
He also said that the SEC will be issuing some guidance for investors about municipal securities soon. ć
