Live Market Survey

Attendees of The Bond Buyer California Public Finance Conference 2023 will have the opportunity to vote in a live market survey at the San Francisco Marriott Marquis on October 19, 2023. Topics will include: current market conditions and future assumptions, issuance projections, municipal credit, evolving investor base, growing focus on ESG factors, among others.

Transcription:

Arlene Bohner (00:05):

Okay. Hi everybody. Please take a seat. I'm Arlene Bohner and I head up the US Public Finance Group at Fitch Ratings. And this is the live market survey. This is the fun panel where you guys get to participate. We've assembled a fantastic panel of experienced market professionals, and with your help, we're going to be able to answer some questions and have a great discussion about trends that we're seeing and what we think the future holds for our market. So before we begin, there is a QR code up on the screen. Please take out your phones. Usually we don't want you to be looking at your phones during a panel. This is the one where we do want you looking at your phones. So take out your phones, use your camera app to aim at the QR code, click on the link that you see there, and you'll be able to participate and answer the questions as we go along.

(01:09)

So while you're doing that, I'd like to introduce our panel. They're all incredibly talented and experienced, and my introduction will not be able to do justice to their deep experience. So I urge you to look up their full bios on the website, but I'll give you a brief snapshot. Marcus Peters down at the end is a Director at Stifel Lawson Company. He's an Underwriter in the Municipal Securities Group specializing in underwriting the firm's California and national large ORR municipal bonds. Bow Daniels to my left is Managing Director and Head of Public Finance at Loop Capital Markets. He has over 30 years of experience and has been a senior banker on over 45 billion of financings during his career. And Tony Hughes in the middle is a Managing Director at Barclays Capital. Among his many accomplishments, he has senior managed and impressive three Bond Buyer deals of the year. So let's get started with our first question. Here we go. Another year of volatile markets led by Federal Reserve policy and economic uncertainty has pushed municipal yields higher. Again, the Muni two year is at 3.68%. The 10 year sits at 3.6% and the 30 years 4.54% per ice. Where do you expect municipal bond yields to be by year end? Bo, what do you think?

Bow Daniels (02:56):

Well, good afternoon. It's great being here. Nice to see this kind of turn out. I think you have to sort of look at the data and if you look at the data, it sort of leads itself to being, we're going to have rates sort of where they're at, possibly higher. I think as you drill deeper and look at, we have resilient economy that's hanging in there, a strong jobs market. And as I tell my wife who I love to death, she's so far left, she makes AOC look conservative that when the government sort of pours 8.5 trillion in the economy and not just the fiscal policy but also the monetary policy where we've had free money for a long time is going to also add to inflation. So the combination of all those factors are going to lead to rates staying up, and I think it's going to be, that's where we're going to see by year end.

Arlene Bohner (03:56):

Okay. Let's see. Tony, do you have anything to add to that?

Tony Hughes (04:01):

Well, I was going to ask Beau. So you're saying rates are staying the same or they're going higher?

Bow Daniels (04:05):

Well, I think they're going to be at least the same, slightly higher. I mean, there's geopolitical factors that may work to our advantage. It's unfortunate that those things happen that actually benefit our market, but I think that may sort of keep things at the current level.

Tony Hughes (04:23):

You're a trader and you're an underwriter. Are you guys shorting treasuries then in light of this forecast?

Bow Daniels (04:28):

I'm a banker.

Tony Hughes (04:29):

Wait until the audience votes and then you'll decide.

Bow Daniels (04:32):

Oh man, I don't know. We'll see. We'll see.

Arlene Bohner (04:34):

Yeah, so let's see what the audience has to say. Okay, we've got 57% saying rates will end the year higher than current levels and 38% rates will be similar to current levels. 3% rates will end at lower than current levels.

Tony Hughes (04:57):

Trying to short.

Arlene Bohner (04:58):

Okay. Let's move on to question two. Issuance in 2023 has failed to keep up with 2022 levels, which were already disappointing compared to the record breaking levels of 2020 and 2021. What are your expectations for issuance in 2024 while the audience is voting? Marcus, what are your thoughts?

Marcus Peters (05:26):

Yeah, this is a tricky question as an underwriter because I'm optimistic that issuance will go up. However, I think if I had to answer honestly, it would be kind of flat issuance. And I think the lack of refunding opportunities is obviously taken out a huge portion of the market. And as we look forward into 2024, especially on the local level, if you look at some of the local school districts and municipalities, a lot of those issuers are going to be waiting for that 2024 election cycle. Of course there's one in March, but the really big bang for your buck is going to be in November. And those November elections don't get certified until December. And so that pushes out any elected bond issuances really into the first part of January of 2025. So sadly, I think issuance is going to be pretty much flat from this year.

Arlene Bohner (06:19):

Okay. Bow, anything to add?

Bow Daniels (06:22):

Yeah, no, I think we agree. I think we're looking at issuance somewhere between 350 to 400 billion next year. And the way we look at it from our perspective is we think that new issuance will probably hang around 250 billion. That's been pretty consistent. And to your point, what we're going to look at in terms of potential refunding, maybe a hundred billion if rates kind of hang in there with us. And the wild card to get us to 400 billion is whether or not if rates rally in the second half of the year, maybe taxable advance for fundings come back. Maybe some of the tenders that are non-tax swaps also are there. So we agree. I think you're looking at it 350 to 400 billion.

Arlene Bohner (07:07):

Okay. Let's take a look and see what the audience has to say and then we'll see what Tony thinks. Okay. Overwhelming majority think we're going to be around the same. Okay. Tony, do you agree?

Tony Hughes (07:23):

My additional color commentary is that it's likely actually to be lower because, and I sort of add two facts. One, you mentioned the tenders, the advance for fundings, and I think about Simon we Ricky's chart that he had yesterday, which showed I think in total 6 billion or something like that of taxable tenders that had gotten done. And even if that number doubled, that's not, that's kind of a rounding error in terms of the overall market. So I don't see that as driving it. I also see the stalemate in Washington as being extraordinarily problematic for large scale projects where they're looking for a federal match, whether it's transportation or transit. And I'm not sure, I know they answer yesterday we heard is that Washington is going to be fixed soon, but that's not here now. And if you're waiting for a 20, 30, 40% match, like for example, Santa Clara VTA, they're delighted that they have a 12 billion project of extending BART down in the tunnel to San Jose, but that's half federal money, it's half sales tax money. And I think that's a problem. So I believe the school stuff and this Marcus, we are very well close to the local market that way, but I think some of these larger infrastructure projects, they're going to be moving a little bit slower.

Arlene Bohner (08:40):

Okay. Let's move on to question three. Building on what Tony just said, with the federal funds drying up persistent inflation and a potential recession, how confident are you in state and local government's abilities to weather these challenges? Tony, what are your thoughts on that?

Tony Hughes (09:06):

Well, that's a good question. First of all, I would start with the overarching comment that I have the unbelievable optimistic faith that state and local governments will weather the storm because they've done it all the time. They have lots of tools at their disposal and they will figure out a way to get by whether it's budgetary or revenue wise. But to give me a little perspective on that, I did a quick survey of a couple of, I checked in on Palo Alto, which is my local city where I live, and we actually have a budget surplus and they're forecasting a budget surplus for next year, went to Pasadena because it seems like another city that started with P. So I went to Pasadena and they are pretty optimistic about their situation. They're not forecasting budget surpluses, but they feel okay. And then I went to Palmdale to continue my P three and their 35 $40 million upside down on a budget of $500 million.

(10:05)

And I guess what I would say is the answer to this question is on a case by case basis, if you have an economy that's diversified that can be resilient in a number of different environments, I think you're going to be okay. I mean, think about the ultimate diversified economy, state of California, and then think about what Fiona MAs said yesterday. I mean, she spent the first half of her speech talking about money that they're giving away. So I think it really is a case by case basis, and I'm confident that state and local governments will figure out a way to survive.

Arlene Bohner (10:37):

Okay, Marcus?

Marcus Peters (10:40):

Yeah, I'd have to agree with Tony. So I started my career, I spent the first four years of my career as a credit analyst at Franklin Templeton. And so every underwriting I do, I dive into the cal or the POS and I go back to my old self and look at these different credit metrics. And over the last year, I'm pretty astounded by how good credit is to this day. I think we learned as an industry a lot during the financial crisis, 06, 07 issuers weren't nearly as prepared as they are today. You look at budgeting has gone further out and gotten more improved and more detailed as well as reserve policies are so much better across the country now that I think most municipal issuers should fare fairly well heading into 2024. There's obviously going to be pockets of stress. And I think if we look at pockets of stress, I'm thinking of pockets where interest rates really affect issuers. So CCRCs or high yield sectors where rates put more pressure on financings, I think could see a little bit more stress. But by and large, I think municipal credit is in a very good spot.

Arlene Bohner (11:53):

Okay. Anything to add?

Bow Daniels (11:56):

No, actually I'm going to wait until question four because I'm going to piggyback on some of this stuff which talks about municipalities and so.

Arlene Bohner (12:04):

Okay, well why don't we see, okay, we have 47% think a moderately good position and 34% a moderately weaker position and only 17% in a good position and 3% in a much weaker position. So interesting. Okay, well let's get to that question four then.

Bow Daniels (12:33):

Yes, and I guess the thing I would sort of comment on just sort of an overview perspective, I think municipalities deserve a lot of credit and they've really done a really good job of managing through some difficult times. And one of the things that we looked at is if you look at municipals as an asset class over the last 15 years, it's really the only group that hasn't grown exponentially. And I think that's a reflection of municipalities just really being very fiscally conservative. And those that maybe didn't do as well got some federal bailout money or at least some money from art money and that sort of thing. And that sort of made things better from that perspective as well. So I think that when you look at what municipalities have coming down the road, obviously all the answer is E, all the above. And I will say one other thing too, having worked with our corporate brethren, one of the things I thought was amazing when you talk about credits, and I think what Marcus is talking about is really a good point. When you look at the corporate market, which is four times larger than municipal market, there are only two, I don't know if you can name them, don't Google this. There's only two corporate credits that are AAA. Only two can you name them? And the easy answer is one of them is not Apple. And so I think that's amazing, and I think that's an interesting dynamic from that perspective. So I think that's what you're going to see on the Muni side.

Arlene Bohner (14:11):

Yeah. And don't you think it also speaks to how well state and local governments have managed that influx of federal money, so many of them used it to build up their resilience to future credit stress.

Bow Daniels (14:27):

No, I think that's right. And I think the other thing too, to Tony's point where you're going to see affordable housing, obviously much more acute in California and New York and other places, and I think everybody challenge has had challenges and headwinds with regards to affordable housing, but it's less so in my home state of Georgia. So I think you're going to see that. But again, all these are key issues, but I think you're absolutely right. Everybody here is spot on in terms of tipping their hat to how our clients have managed situations going forward and managed sort of the federal money to one of the panels yesterday made a really good point that only 60% of a lot of the federal money that went out to municipalities has been spent yet. So I think it speaks to folks being conservative, making sure they're using the money smartly and that sort of thing.

Arlene Bohner (15:18):

Marcus?

Marcus Peters (15:20):

Yeah, from the desk perspective, I think inflation for me is one of the chief concerns that affects really all state and local governments. As we've talked about it, a lot of these are very acute. If we look at climate change in California and Florida, it really sticks out. But inflation, we just got CPI last week, core inflation rate at 4.1%. If you were to tell me at the beginning of the year that the Fed was going to get to 5.5%, hike 11 times the fed funds rate, and we were only going to be at 4.1% when their Fed funds or their target inflation rate is two, I would say you're crazy. So I think we're going to continue to see inflation and inflation at roads, the dollar value, it makes projects more expensive to finance. We work with a lot of smaller municipalities and project costs go up from 20,000 to 30,000. That's just for the raw materials to build a project. And now you're looking at financing a $30,000 project at 6% interest rates instead of 4%. So I think inflation really does affect both the small and the large issuers. It makes pension liabilities worse. So I think for me, it's definitely got to be inflation.

Arlene Bohner (16:36):

That's a good point. I think I would also say the inflation and rising rates, the fed tightening and inflation have really increased the risks of a recession, which we think is likely to happen in the first half of 24 and pressure on states and locals could escalate, particularly if that brings a market reduction in wages and income and also consumer spending, which up till now has been pretty resilient. We're already seeing rising costs for borrowing, for construction, for labor. These are all impacting budgets at this point. But for the most part, as I said before, states and local governments are really well positioned to withstand what we think will be a pretty mild economic downturn in 24, let's see what the audience had to say, inflation rising rates 45%. Okay. Affordable housing, pension liabilities, then effects of climate change and federal regulatory changes. And very few think cybersecurity threats are the most pressing issue. Interesting. Alright. Let's go to question number five. How have AI machine learning and electronic trading impacted the Muni market thus far? Marcus, why don't we start with you?

Marcus Peters (18:11):

So I would definitely see some efficiencies and expect that to increase in the near future. The last time I was on a Bond Buyer panel, I joked that in five years we'd be underwriting in the metaverse, and it was a bit of a joke, but in this five years, technology in the municipal market has grown very rapidly. First we saw auto bidders just in the last two years. The firm I worked with purchased an algorithmic trading firm. We've seen the growth of ETN, data repositories, portfolio management software on the buy side, so it is becoming more digitized and auto bidders or algorithmic trading is really kind of the first step of that process. And as AI grows in prevalence, we're going to see an algorithm that executes a series of steps to an algorithm that is self changing using artificial intelligence. And so we're in the early stages of that, but just seeing how rapidly AI is infiltrating other sectors, I wouldn't be surprised that we have AI trading firms within two to three years.

Arlene Bohner (19:21):

Tony, anything to add to that?

Tony Hughes (19:26):

Yes and no. I had a really good answer scripted for this, and then I ran into a guy yesterday named Greg Bean stock, who told me that there's a difference between AI and technology and technology tools because I was focusing on my AI experience, which was we got an RFP in-house from a major California issuer who is desperate to know our thoughts on whether they should pursue a master lease structure, an individual standalone COP structure. And my son who's 20 says, dad, what are you doing? I said, I'm working on this really important RFP. And he says, well, you should just go to chat GPT and it'll solve the problem. So I went to chat GPT, and I typed in what I was looking for and I got three paragraphs. It read perfectly from front to back. And then I thought, this is good, but it doesn't quite reflect the nuance that I know of this particular issuer. So let me go through and kind of make a few comments here.

(20:24)

And then I made a few comments. I was editing the text so it sounded consistent, and then I thought of a couple other things that maybe chat hadn't figured out, and I was adding that. So three hours later, okay, I've got this brilliant three paragraph thing that I'm not sure the client might've read or was a factor in them determining whether we were the most important or best firm to use. But I think that what that highlights for me is that there's still some room to improve here in the program, but that there are a lot of inefficiencies, let's admit it in our business. And I do believe that these technology tools as they get smarter and as we use them more, can extract a lot of value. So I definitely subscribed to the first one of those with maybe even a heavier emphasis on that.

Arlene Bohner (21:12):

Would you ordinarily have taken less than three hours to write those?

Tony Hughes (21:16):

I start from scratch. I'm pretty sure I could have done it in 45 minutes, but.

Arlene Bohner (21:19):

Okay.

Tony Hughes (21:20):

It's still the same value.

Bow Daniels (21:23):

If I can add something too, when we were sort of planning and putting stuff together about which question we wanted to take first, this was a question I absolutely had little interest in. And part of the reason is I'm still trying to understand to your point, what AI is. When folks asked me about cryptocurrency and Bitcoin, I said, I don't really understand it and still don't. And I'm trying to get smarter about it. And I think what you're seeing here are some of the dynamics about how the process is evolving. And I think it's important, but again, I'm still trying to get up the learning curve on how that works too.

Arlene Bohner (22:01):

Yeah, I learned a lot at this morning's AI session. That was really great. Let's see what the audience has to say. So most people think we'll see some efficiencies and expect that to increase in the near future as we all figure out what we're doing with chat GPT. Right. Okay.

Tony Hughes (22:23):

I think we're five for five right now up here. We're doing well.

Arlene Bohner (22:26):

Okay.

Tony Hughes (22:27):

Are they voting before we talk or after we talk? Are we influencing the votes or are they just.

Arlene Bohner (22:33):

I don't know. I think you can change your vote, but I think most.

Marcus Peters (22:35):

self-learning algorithm.

Arlene Bohner (22:37):

Yeah, right. Is it Chat GPT answering. Okay, let's go on to question six. The fact that many transit agencies across the US are facing fiscal cliffs due to inflation under funding reduced ridership and drying up of the federal subsidies. How are they beginning to address the challenges? Tony, why don't we start off with you?

Tony Hughes (23:04):

Yeah, thank you. Of all the questions, this is the one I actually wanted to take the most just because I've done so many transit and transportation related financings in my career. Transit is a funding fiscal challenge as we all know. I had a colleague, a former secretary of transportation in the state of North Carolina who had a comment about transit. He said, everybody's for transit, Tony, they're for transit because they want that guy in front of them to get out of their way and take the bus so they can drive faster. And if you think about it, it's not an unusual view to have. Lemme give you a couple other data points around transit and then I'll share with you an idea that I think maybe could be interesting in the reflection of the situation. First is I had lunch yesterday at the Fama lunch with a gentleman who rides his bike every day in San Francisco to work, which is, as you can imagine, a crazy thing given the streets and the traffic and all that stuff.

(24:04)

He said, why don't you take the bus? And he described two instances where he was on Muni and one he got actually physically stabbed. The other one, he was accosted. He said, I'm not doing that anymore. I'd rather get hit by a car than do that. And then at dinner last night, I was sitting next door, another fine gentleman, and he lives in the Far East Bay and he used to take Bart every day and now he drives every day to San Francisco. And myself is another example. I mean, I live in Palo Alto and I used to take Caltrain and now I drive. So I think a couple of things. One is people aren't going to take transit until they have to, okay? Until the traffic is so bad. But even if the traffic is bad, they're not going to take it if they don't think it's safe.

(24:53)

And I think there's a serious concern with respect to public safety and public transit that needs to be addressed before people think about that. And now, let me get to my idea, and my idea is born a little bit out of this. My experience having started a social enterprise nonprofit down in the Bay Area, my wife and I run a cafe that hires adults with developmental disabilities. And so we make money selling very high quality food and drinks and things like that, but we don't make enough money to pay for all of our expenses. Sound familiar? Transit provides a very valuable service, but it doesn't make enough money to pay for all of its expenses. So my idea, crazy as it might be, is that we ought to think about transit as a public good and maybe as a nonprofit that it creates. Because to be honest, I don't think it makes sense to tax everybody in a county a half a cent on every purchase they make to put a bus line in that runs and carries one passenger. But I do think that the overall value of transit in terms of air quality and congestion relief and things like that are public goods in many ways that other nonprofits are providing. So I would say we should allow public transit to be recharacterized as nonprofits, social enterprises, and then people, if they want to support the public good, that creates, that's another funding source that could help make this thing work. That's how many nonprofits work and why not transit?

Arlene Bohner (26:21):

Bow, what do you think?

Bow Daniels (26:22):

Yeah, first of all, whatever I see on TV with a media or read on XI immediately discount as being hyperbolic. And clearly when you look at mass transit, it's been impacted. I agree with Tony. I think people will eventually come back when they have to, when they feel safe, and those are certainly a key dynamic there. But the other thing I wanted to point out is things aren't as dire as they seem when you look at mass transit because they are being augmented by sales taxes we talked about and other types of taxes. So when you look at where a number of these mass transit agencies are, their fair boxes are down, but they're getting supplemental income from, whether it's sales tax, that sort of thing, that's certainly a positive. And when you think about, as we mentioned earlier, how they've managed some of their federal money, they're okay for now, and I think they're going to be okay in the immediate future unless we see a downturn in the economy and then they'll be impacted again by sales taxes.

(27:28)

The other thing I want to point out, when folks mention what other things are being done, you look at what New York's doing now with congestion pricing. That's something that's been done in Europe in major cities. New York's doing it, MTA, we tipped their hat. I think others have looked at it. We may start seeing that as well. The folks that want to drive and sit in traffic still, you're going to get nicked for it and you may say, Hey, maybe I'll start to get back on transportation and go from there. So I remain somewhat a positive outlook, but again, there's still headwinds and we'll see what happens, especially if there's an economic downturn.

Arlene Bohner (28:08):

Okay, let's see what our audience thinks, both A and B, almost three quarters. People think both starting to rethink the business model for mass transit and also looking for ways to address revenue shortfalls. Okay. Let's go to our next question. Number seven. Heading into 2024, what is the expected impact of the significantly changed employee work schedules and decreased office space, occupancy rates on commercial downtowns, Marcus?

Marcus Peters (28:50):

Yeah, I think cities will definitely adjust within the next decade, and this is going to be pretty sporadic throughout the United States. I mean, if we look at New York City, New York City is a very diversified economy, not super dominant in any one sector, and it really has a distributed residential base. Compare that to, of course, San Francisco is where I live. I love this city. San Francisco is definitely going to have to go through a bit of a transformation. One thing that not a lot of people know about San Francisco if they don't live here is that the actual downtown part of San Francisco is never where people lived. It was always the financial district. Most people live in the marina or Cal Hollow or the inner Sunset. So the actual downtown district of San Francisco was purely commercial and leading up to the Covid crisis, San Francisco has spent a lot of resources developing commercial office space and commercial office space is definitely going to change over the next several years.

(29:52)

I think there's 1.5 trillion in commercial loans coming due in the next three years. This will undoubtedly devalue commercial real estate assets, but cities like San Francisco that have really strong residential bases combined with Prop 13 will be able to offset some of that and the actual core of the downtown district will need to change. And I think it will. San Francisco's reinvented itself many times, and I think this is a perfect opportunity. Once rents come down, we'll be able to have the local baker or the local coffee or the local haircut spot that can afford rent again. And so once there's that readjustment, which will be painful, I think the city will be in a much better footing. I think each city, I think Bo's from Atlanta, he can talk a little bit about the specifics there, but each kind of city has its own challenges. San Francisco, because of its outsized tech influence was really exposed to remote working.

Arlene Bohner (30:56):

Tony, does your perspective as an operator of a small business, does that color your thoughts on this question

Tony Hughes (31:05):

A little bit? I think I have two perspectives. One is it's tied to the second is that this cafe that we run in Palo Alto, we actually had one in San Francisco too, so we had opened a second location down on Hill Street here. And I will share that working with the city and the county of San Francisco as a business owner is not easy and it's not without its challenges. They didn't make it easy even for a nonprofit to do business here. So I think that's something that the city's going to have to think about as they want to rebuild and reorganize and refocus. And I guess I'm stuck with my PE situation because my wife is from Pittsburgh, Pennsylvania, and I've seen that over the years and what's happened in Pittsburgh, and I know people use that as an example of another urban area that was dramatically hit, obviously with the steel mills closing and the economic depression that followed there.

(32:02)

But I'm telling you, if you went to Pittsburgh now and you figured out and you saw what was going on with Carnegie Mellon and Pitt and all the development and the AI and the tech there, you would say, well, that's a good model. That's good. And I did a little look around what drove that, and I think that there's two things that stuck out. One is obviously in Pittsburgh there's some world-class universities. In San Francisco, we don't have that, but obviously there's great education here in California, but with Pitt and Carnegie Mellon, Pittsburgh has got a base of energy there. But the other thing that I think one of the guiding things that led the leaders of Pittsburgh back then was they literally said, let's figure out what smart young people want and put it in there and then the rest will come. It took a while, right? But it definitely paid off.

Bow Daniels (32:54):

Yeah. Let me just add one other thing too. I agree with Marcus. I think municipalities and cities are going to be able to pivot and adjust when the business sector figures out what the new normal is. I know we're having a tough time trying to figure out, trying to get people back to work, that sort of thing. We were at four days a week, then we're worried about losing people. I know a number of the law firms, people are still adjusting to what the new normal is post covid. I'm going to end with I think what Jamie Diamond said, I think pretty much sums it up. He said, our kids are going to work three and a half days a week and live to be a hundred. And I think that's probably where we're going to end up.

Arlene Bohner (33:38):

Okay. Let's see what our audience thinks about this. Okay, cities will adjust fully within the next decade, 39%. Well pretty evenly split here, right? 33% of people think cities are seeing some rebounding of office space occupancy, a pattern that will continue. And some people think cities are severely impacted and unlikely to regain full commercial capacity within the next decade. So jury is still out on this one. Okay, let's move on to question eight. What will have the biggest impact on the public finance industry heading into the new year? Bow, what do you think?

Bow Daniels (34:25):

Well, I mean, this is a tough question because clearly if a recession hits, that impacts everybody and that will be a key dynamic. But I'm going to go with market volatility because it impacts our market so substantially. And I think someone had, one of our underwriters had said to us that there was a deal that priced this week, a high credit New York AA plus we saw a 5% coupon at par. So I think there's two things here with regards to volatility. Part of it has to do with our mindset mentally adjusting to what we're seeing in the marketplace. And it's going to be for everybody. It's going to be for issuers, it's going to be MAs, it's going to be bankers, lawyers, it's going to be everybody. We have to sort of adjust from a period where in January of 2022, we had the 10 year treasury at 1 63 and now it's nearly 5%. So there's a mental aspect that we have to adjust to the volatility as well and how we price deals, how we take risk, and how we're going to proceed with doing our business because we've had a prolonged period of stable and low rates, and now we're going into another period of volatility. It's going to be difficult. I think we're going to get through it because our market is amazingly resilient and strong, but I think some of our psyche is going to be impacted going forward.

Arlene Bohner (35:58):

Okay, Marcus?

Marcus Peters (36:01):

I think a recession or economic downturn at some point in the next year or in 2024, probably towards the back half of the year. I think one thing that's interesting is if you look at the two 10 spread has briefly inverted in March, 2022 and then went positive and then reverted again in July, 2022 and has been inverted ever since. So that's 15 months. If you go back to 1955, the average, once the curve has inverted, a recession has proceeded in the next six to 24 months, I think with the average being around 14. So the market at least expects a recession at some point. Economists earlier in the year projected 65%. The Fed has whittled them down with their soft landing narrative, and so that has come down to 55%, but as I look at the consumer will need to slow down at some point. Just last week we did get consumer confidence came in at 0.7%, very strong.

(37:06)

But if you look at underneath the surface a little bit, you look at, for instance, household debt reached an all time high credit card usage is now at over 1 trillion or 1.03 trillion. So there are signs starting to develop that the consumer is slowing a bit. I think the good news is, is that compared to the Covid outbreak this time around, the Fed actually has a little bit more leverage in the sense of lowering rates because going back to that 1955 and the eight recessions that happened since then, the Fed has had a drop the Fed's fund rate by about two and a half percentage points below the 10 year treasury. When I walked in today, it was about 5%. So the Fed has a lot of ammo that they can do. They can lower the Fed funds rate by 2.5%, which gets us to a two point a half percent fed funds rate. So they definitely have a lot more ammunition this time compared to heading into the pandemic when we were already near the zero bound and they didn't want to go into the experiment of negative interest rates.

Tony Hughes (38:17):

You guys have both talked about the market, and I appreciate that. I think those are very insightful comments. I think the question focused, I think on public finance industry, which I'll take Demi from a public finance side, and I'll say that I think that, well, listen, I don't know that I've ever had a project. Well, the projects that we work on, the financings, we do, listen, everybody wants to get the lowest rate possible, but they're going to take the market rate. And when I go to a client and they say, man, rates are really good, they say, well, we're not in the business of timing the market. I mean, they're going to bring their deals, their transactions, their projects, when they're environmentally cleared, when the board has approved them, when the people they'll live in the city and the county are all in favor of it if they can not necessarily driven by the market.

(39:05)

So my answer to this question of what's going to have the biggest impact on the public finance industry at large, which includes bankers, advisors, issuers, lawyers, is I think low volume is going to be an issue. I think it's going to affect our approach. There's going to be incredible competition for those deals amongst all the market participants. I think the SEC actions that were sort of, I'm not here to speak officially on anything, but the SEC actions in connection with the MA situation are potentially challenging, but I also think that the 24 election cycle is going to be very important. And I know we've got a presidential election, but it's really the city councils, county supervisors, and the special district appointees that if they don't know they're in their seat, they're not going to feel comfortable approving large capital expenditures. And I think that that's going to have an effect. So that's my view on the public finance side, and then coupled with your market perspectives, it's going to be a tough time. We have to make it work.

Arlene Bohner (40:18):

Let's see what the audience thinks. Okay, market volatility, 45%, recession, economic downturn, 33%, 2024 US elections, 10% geopolitical tension seven, and the others down below. Okay. Let's move on to question nine. To what extent has focus on ESG factors grown or are expected to grow the Muni space? Tony, why don't you go first?

Tony Hughes (41:01):

Did I sign up for this one?

Arlene Bohner (41:06):

You can skip if you don't.

Tony Hughes (41:08):

Listen. I know that I remember sitting at a bonfire dinner, I think it was probably five years ago, upstairs at a restaurant, and I was trying to force people to explain and understand how with no value, with no interest rate, basis benefit, this market was going to grow. And I think that I'm still kind of struggling with that. I think in connection with certain issuers, it's extraordinarily important that they have their bonds certified and that they can represent that their green bonds and other ESG factors. I think situational, every city, county state is different if you're in the Central Valley or if you're in San Francisco. I think you have to be very situationally aware of where you are and how you conduct yourself and what you're offering up. That's my response.

Arlene Bohner (42:06):

Bow.

Bow Daniels (42:07):

Yeah, I think when you look at the municipal sector, by definition, we issue debt. There's some social benefit. I mean, there's almost an ESG component, and so I think that by definition we do that. I think that what's interesting, I will also say I think unfortunate that ESG and disclosure and whatnot has been politicized. Take that from a person who lives in a blue city, in a red state, well, I should say a purple state now, and I think it's unfortunate that it has been politicized, but I do think though it's positive disclosure, it's good disclosure. I agree. It'd be nice if issuers were paid for that, but at the same time, information investors do care about where climate change, what happens if you're buying a bond that's issued by the city of Miami and are concerned about flooding and things of that nature.

(43:05)

I think those are factors, and I think that's something that we need to look at. I will also add that one of my good friends is a legislator in Georgia who's a Republican who said, Bow, please remember, we may not care as passionately, but we do care about climate change. We just call it something different. It's called we're going to rebuild the seawall or something like that. It's not like, again, as I mentioned about the media, it's not like we don't care. We do care. We're not going to say it like you guys do and that sort of thing. So I think all those are factors, but I think it's, as I'm on the MSRB board, and I know that's something that we're looking at, I think a lot of regulators are looking at, Hey, how do we make this more streamlined? But I think by and large, the industry has done, again, a pretty doggone good job.

(43:54)

The lawyers with disclosure, issuers with disclosure investors care about that, and I think they're continued to work through it. And as we all know, as underwriters, and I'd love to get your thoughts on this, Marcus investors are always going to try to beat you back on any type of opportunity to get any type of oh one on pricing. But the bottom line is if you can get more people, and again, the buy side is sort of geared up, if you can get more people involved, you get more demand for your bonds, you're going to get a lower cost of capital. And that's what we all strive for.

Arlene Bohner (44:26):

Okay. Marcus, did you have something to add?

Marcus Peters (44:28):

Yeah, just one point to add and I think a good point Bow brought up was I think the interest rate environment actually helps the ESG conversation because if you look, the conversation has been growing over the last five years, but we've been in an ultra low interest rate environment and it's hard for a portfolio manager who's benchmarked and has to compete with other firms for capital to give up an oh five when interest rates are a one 40 on the long end or a 127 that we reached in August. It's hard to give up five basis points now that we're at 5% for a AA rated issuer in 40 years, 30 years, it's a little bit easier to pay up five basis points for an ESG bonds. So I wouldn't be surprised in this kind of new paradigm we're in with slightly higher interest rates that we start to see pricing benefits for ESG bonds.

Arlene Bohner (45:24):

Okay, that was a hot topic in the prior panel. Let's see what the audience thinks. To a limited extent, 50% already see evidence of it and expect the growth to continue. 38%, not at all, 12%. Okay. Anybody surprised by that? No. No. Okay. Alright. Let's go to our last question. There are two ducks in front of a duck, two ducks behind a duck and a duck in the middle. How many ducks are there? I won't ask for volunteers to discuss this, but let's see what the audience has to say.

Marcus Peters (46:17):

Mark Capelle, you should get this one.

Tony Hughes (46:20):

See duck.

Arlene Bohner (46:21):

Do we have the answers or has it not been long enough? I don't know. Can we see the, there we go. Okay. So 52% of people think five 47% think three, 3% think four. Okay. So the answer is three. Congratulations to those who got it. Two ducks are in front of the last duck. The first duck has two ducks behind one duck is between the other two. That's how you end up with three and people are changing their answers as we speak. Excellent. Okay. Well I think we may have time for one question if anybody has a question for our esteemed panel. Nope. Not seeing any questions. So I will just say thank you to Bow and Tony and Marcus and enjoy the rest of the conference.