Market reacts to downsizing: U.S. Bank was 'never a player', 'never able to scale up'

Municipal bond market participants reacting to the news of U.S. Bank’s downsizing and reorganization said the move is clearly a sign of the times driven by regulations, technology, and legislation.

“Most costs are rising: regulatory, technology, and vendors are tightening licensing restrictions or adding fees,” said a New York municipal manager.

He added that revenue spreads are shrinking, including banking fees on new issues due to competition and secondary mark-ups due to e-trading and transparency.

“The retail demand universe that allows for a more generous mark-up continues to gravitate to fee based accounts; which transfers the mark-up from trading desks to financial advisors and fund advisors,” he explained.

In addition, he said the new tax reform law has dampened demand and that was a contributing factor to the consolidation of some muni firms, including U.S. Bank.

It’s all about the bucks, one market participant chimed in.

"It comes down to the fact that they were not making money in general markets, they are staying in business - but they are focusing in on areas and spots where they are making money/where they think they can make money," said one New York banker. "It's hard to make money in the muni business unless you have huge scale. U.S. Bank was never able to scale up and compete in the general muni market space."

This was echoed by another market observer.

“There continues to be a lot of competition [in the muni marketplace] with many firms competing for less business amid dwindling spreads,” he said. “It’s not for everybody.”

It apparently made good business sense to do it at this time, with some asking “what took them so long?”

Another New York banker said that the news isn't surprising and won't really make an impact.

"When they did not replace Rick Kolman [after he left to go to Academy Securities], it was a signal," he said. "They were never a player and it goes to show you have to be a big player to make money today, even on the credit side." He added that it is just a continuation of the recent trend of consolidation or exiting the muni business, with the most recent example being William Blair.

But in any downsizing, there is always a human cost that must be weighed.

The firm has now really lost a lot of their experienced talent, veterans that were well known in the business and had a client base, a source said, adding that "it’s going to be tough for those still left, who are probably also now looking for jobs."

Secondary market
Wariness was the watchword among municipal bond market participants on Thursday as yields began to march back higher.

Buyside sources said there was still a tentative mood among investors.

“The tax-exempt muni market right now is all about high correlation with Treasuries as rates go higher with steeper curves,” said Peter Block, managing director of credit strategy at Ramirez & Co. “There appears to an imbalance of sellers versus buyers right now as 2s and 30s became rich and the critical five-year and 10-year spots underperformed.”

He added that there is still a lot of cash that is waiting to be deployed in munis, but "we think investors are cautious right now, waiting for better entry points as we have yet to settle into a tighter trading range.”

Primary market
The Pennsylvania Commonwealth Financing Authority on Thursday released a second supplement to the preliminary official statement on its sale of $1.39 billion of tobacco master settlement payment revenue bonds, which was moved off the day-to-day calendar and scheduled for pricing on Tuesday.

Morgan Stanley priced the Los Angeles Department of Water and Power’s $231 million of Series 2018A water system revenue bonds for retail investors after holding a retail order period.

The issue was priced as 5s to yield from 1.77% in 2023 to 3.02% in 2039. A 2043 term bond was priced as 5s to yield 3.06% and a 2048 term was priced as 5s to yield 3.12%.

The deal is rated Aa2 by Moody’s Investors Service, AA-plus by S&P Global Ratings and AA by Fitch Ratings.

Since 2008, LADWP has sold about $13 billion of debt, with the most issuance occurring in 2010 when it offered $2.06 billion of bonds. It sold the least amount of bonds in that time frame in 2008, when it sold $550 million of debt.

In the competitive arena, Silicon Valley Clean Water, San Mateo County, Calif., sold $137.67 million of Series 2018 wastewater revenue bonds.

Morgan Stanley won the bonds with a true interest cost of 3.4382%. Pricing information was not available.

The deal is rated Aa2 by Moody’s and AA by S&P.

The issuer has come to market only twice before in the past 10 years — selling $130.2 million of bonds: $60 million in 2014 and $70.2 million in 2015.

ICI: Long-term muni funds see $1.89 billion inflow
Long-term municipal bond funds saw an inflow of $1.89 billion in the week ended Jan. 31, the Investment Company Institute reported on Wednesday.

This followed an inflow of $2.46 billion into the tax-exempt mutual funds in the week ended Jan. 24 and inflows of $2.46 billion, $3.16 billion and $509 million in the previous three weeks.

Taxable bond funds saw estimated inflows of $7.36 billion in the latest reporting week, after experiencing inflows of $12.66 billion in the previous week.

ICI said the total estimated inflows to long-term mutual funds and exchange-traded funds were $21.93 billion for the week ended Jan. 31.

Tax-exempt money market funds saw inflows
Tax-exempt money market funds experienced inflows of $841.3 million, bringing total net assets to $138.36 billion in the week ended Feb. 6, according to The Money Fund Report, a service of iMoneyNet.com. This followed an outflow of $285.1 billion on to $137.52 billion in the previous week.

The average, seven-day simple yield for the 197 weekly reporting tax-exempt funds fell to 0.62% from 0.69% the previous week.

The total net assets of the 828 weekly reporting taxable money funds increased $7.85 billion to $2.646 trillion in the week ended Feb. 5, after an inflow of $25.32 billion to $2.638 trillion the week before.

The average, seven-day simple yield for the taxable money funds increased to 0.98% from 0.97% from the prior week.

Overall, the combined total net assets of the 1,025 weekly reporting money funds increased $8.69 billion to $2.784 trillion in the week ended Feb. 5, after outflows of $25.61billion to $2.775 trillion in the prior week.

Previous session's activity
The Municipal Securities Rulemaking Board reported 47,387 trades on Wednesday on volume of $13.08 billion. California, Texas and New York were the three states with the most trades on Wednesday, with the Golden State taking 15.09% of the market, the Empire State taking 12.679% and the Lone Star State taking 9.902%.

Treasury to sell bills next week
The Treasury Department announced the following auctions for next week: $48 billion 91-day bills selling on Feb. 12; $42 billion 182-day bills selling on Feb. 12; and $37 billion 30-year TIPs selling on Feb. 15.

Treasury also auctioned $16 billion of 30-year bonds with a 3% coupon at a 3.121% high yield, a price of 97.654131. The bid-to-cover ratio was 2.26.
Tenders at the high yield were allotted 10.65%. The median yield was 3.060%. The low yield was 2.888%.

Gary Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.