Muni Think

As this year ends, market sentiment, as measured by Municipal Market Data, is more subdued than usual. We can think of a few possible reasons.

Global equity investors and sponsors continue to demonstrate strong interest in investing in U.S. infrastructure, notwithstanding the relatively anemic pipeline.

No clarity has been offered with regard to the extent of the reasonable diligence obligations of those participating in competitive deals, as co-managers, syndicate members or selling dealers.

The costs of issuing, trading and managing portfolios of tax credit bonds would cause such securities to be unappealing both to issuers and investors.

Underwriters of municipal bonds have an obligation to perform due diligence on the issuer and any other individual or entity that may be required to make payments on the bonds as they come due.

The notion of option-adjusted spread (OAS) is the standard analytical tool for taxable fixed income securities. It is also making inroads into the muni market. Unfortunately the usual implementation for munis is flawed, rendering the results virtually meaningless. So it is understandable that many muni professionals shy away from OAS in favor of the archaic ‘yield-to-worst’ approach. Correct implementation would undoubtedly attract converts.

The slowing Chinese economy and the strong U.S. dollar have the potential to impact export oriented industries in the U.S.

The second wave of underwriter settlements was similar to the first, but with some new details on issuers failures to comply with prior continuing disclosure undertakings.

Rating upgrades overlook rural and secondary markets with high unemployment and aging demographics that will continue to challenge hospitals in those markets.