National Outlook 2022: Live Market Survey

Attendees of The Bond Buyer National Outlook Conference 2022 will have the opportunity to vote in a live market survey at the Metropolitan Club in New York City on March 1st, 2022. Topics will include economic growth, total issuance, taxable municipals, state and local government credit conditions, growing focus on ESG factors and more. Fitch Ratings’ Arlene Bohner will lead the Live Market Survey panel discussion with a diverse group of industry experts.

Transcription:

00:00:10:20 - 00:00:35:26
Arlene Bohner

Hi, everyone. This session is going to be an interactive one. So as you just heard, we're going to have some polling and we're going to talk about the results in real time. The results are also going to appear in an upcoming Bond Buyer issue. So we really appreciate your participation. 

00:01:21:29 - 00:01:52:00
Arlene Bohner

I just want to take a moment to introduce our panel. These are a group of incredibly talented and experienced folks who are joining us today. I encourage you to look at their bios and in the program. I'm just going to give you a little snapshot right now. To my left is Marcus Peters. He is a director at Stifel, Nicolaus and Company.

00:01:52:19 - 00:02:23:00
Arlene Bohner

He is an underwriter in the Municipal Securities Group specializing in underwriting the firm's California and taxable municipal bond issues. Next, we have Dave Erdman, who has been a member of the State of Wisconsin's Capital Finance Office since 1994 and capital finance director since 2015. He is a member of the GFOA committee on Governmental Debt Management. And he's also a volunteer advanced EMT for his hometown. 

Next, we have Rick Kolman, managing director and head of Municipal Securities Group at Academy Securities with 35 years of impressive and varied experience in the municipal securities industry. He's served on the MSRB as well as the Executive Committee of SIFMA where he was chairman of the Municipal Division.

00:02:51:17 - 00:03:19:07
Arlene Bohner

And last but not least, we have David Womack of New York City. He is the deputy director for Financing Policy and coordination at the Mayor's Office of Management and Budget. He also serves as executive director for the New York City Transitional Finance Authority and Chief Executive Officer of the New York City Municipal Water Finance Authority. And President of the Hudson Yards Infrastructure Corporation. 

00:03:19:16 - 00:03:48:18
Arlene Bohner

So with that, I think we will dive into our first question. 

00:04:16:01 - 00:04:36:24
Arlene Bohner

Okay. We can put our results up on the screen, please. So this question was about the future of rates and it looks like most of our participants believe that rates will rise. What do you think about that, Rick?

00:04:37:16 - 00:04:56:00
Rick Kolman

I guess from what point? Because as Dave Womack and I were just saying, maybe we should revise all the questions given what's happened, but just to put a couple things in perspective. And I think we all know what's going on today with obviously Eastern Europe. And you look at what for those that didn't follow the market this morning, the 10-year Treasury was down to a 1.70%.

00:04:56:21 - 00:05:14:15
Rick Kolman

So you're talking 30 odd basis points from when this panel had our first meeting.

00:05:14:20 - 00:05:32:28
Rick Kolman

Keep in mind Chairman Powell is speaking this week to Congress. So there is a view and we're seeing that today where the curve now is getting steeper again front end rates have dropped a lot more than the long around, but overall rates have come down. I just don't make two comments about, you know, where we were today and we talked earlier.

00:05:32:28 - 00:05:50:25
Rick Kolman

We again talked about supply. And again, it was touched on earlier. But, you know, our market is a supply-demand market. And as you came into January, there was a view you'd have a calendar typical of January. As Angelia said earlier, you had 100 plus billion of inflows last year. Pretty much every week was positive.

00:05:51:02 - 00:06:09:20
Rick Kolman

We came into this year with the same view, positive inflows, bonds being called, coupon reinvestment. We didn't have much volume. To give you an idea of the first week of the year, corporates did over $10 billion in volume. We did a billion. So clearly it was a great time for munis, right?

00:06:09:21 - 00:06:28:15
Rick Kolman

Wrong. Turned out January was the worst performing month of January since 1981. For those who weren't aware that that's how bad our performance was. And you sit there and go, yeah, but there was no calendar. You know, you're right. But I want to point out to everybody real quick, and this is going to, what you have to keep an eye on as we move forward.

00:06:28:23 - 00:06:54:20
Rick Kolman

What really crushed our market was selling from bond funds during January into February. Just to give you an idea, last year, the average day of bid wanteds was about $500 million. This year it's been about a billion. Last Wednesday, we had $1 billion of bonds for the bid from investors.

00:06:54:28 - 00:07:14:28
Rick Kolman

A billion seven on Thursday, a billion plus yesterday. That's real supply. And that's much more supply than volume, because when you have a bond deal like New York water today, you know what's coming. There's pre marketing. When bonds are being sold by investors, it's total chaos. You don't know what's going on. So to me, the key as to where this market goes from here is what do these investors do?

00:07:15:13 - 00:07:33:16
Rick Kolman

It doesn't seem like going to get positive inflows. Do they continue to sell bonds? That really is the focus at least to me in today's market. What are the funds going to do? Because again, we are a supply-demand market and they're providing us the supply right now. Yes, we have muni bonds, but not as much as it's traditionally there, providing supply with bids wanteds.

00:07:33:16 - 00:07:37:22
Rick Kolman

And their demand factor is definitely a lot weaker than it was during most of last year.

00:07:41:09 - 00:08:02:01
David Erdman

From an issuer perspective, you know, obviously rates have gone up. They're going back down. I started in 1994 and the first 20 year bond issue I had had a true interest cost rate of 5.8%-5%. I could do that same bond issue in the current market and probably be near 3%. So, you know, yeah, rates are going up but historically I mean we're still in a good interest rate environment from an issuer's perspective.

00:08:04:02 - 00:08:23:14
David Erdman

Secondly, you know, how many times over the last 12, 15 years have we said, yeah, rates are going to go up and you get to December 31st and rates actually end up being down. Yeah, there are some different pressures right now, but you know, I've lost that bet a few times in my time, so we'll wait and see. But I really don't think the rates are going to go up as fast as the people are projecting.

00:08:25:01 - 00:08:44:05
Marcus Peters

Yeah, that's, you know, one other comment as relates to, you know, we are definitely a supply demand driven market, but we take cues from the Federal Reserve and the Treasury market. And if you look at just where rate hike probabilities have gone from December 30, first you know, we were looking at 3.2 hikes on the Fed funds futures.

00:08:44:14 - 00:09:08:09
Marcus Peters

We're now at six after Russia-Ukraine that probability actually didn't increase or decrease. We're still looking at around six hikes. But the constitution of when those hikes come definitely did change. So we went from a 40% probability of a rate hike or a 50 basis point rate hike in March now down to 16% of a 50 basis point. So I don't think the Fed is going to be quite as eager.

00:09:08:24 - 00:09:29:04
Marcus Peters

And if you believe Bullard that we could be at 1% Fed funds rate kind of in that June timeframe. Well if you look back the last time we were at a 1% federal funds rate, we were in the context of a three 30 on the 30 year Treasury in about a 2.23% on the 10 year. So we did have some moves.

00:09:29:14 - 00:09:54:22
Marcus Peters

We could have some possibilities to move higher I will say, though, obviously we're in a very different environment. If you look at just the sheer amount of liquidity in our market now, you know, back then, if you look at 2017, the Fed balance sheet was at 4.3 trillion. Now we're at 8.9 trillion. And so after several rounds of QE, infinity we're at the largest Fed balance sheet we've ever seen.

00:09:54:22 - 00:10:08:05
Marcus Peters

So I think this time is definitely different. We're not going to be peaking at as high rates as we did during the last cycle. Because of this excess of liquidity in the market and some of the supply demand imbalances that Rick talked about.

00:10:09:12 - 00:10:13:12
David Womack

And just to echo what Dave said from issuers perspective.

00:10:14:05 - 00:10:37:17
David Womack

The question asked about the next six to 12 months, but we're looking at substantial intra and four week volatility as a New York City as a large issue and a large supplier of bonds. And we have to try to keep some deals do well, some deals do not. And we have to be opportunistic as we face these environments.

00:10:38:00 - 00:11:01:05
David Womack

And also we have to be cognizant of the fact that the absolute level of interest rates are still quite attractive for us. So we can still generate more funding, savings and attractive cost. We do have a large capital program in New York City where people will be there and we have to enter the market. We have to be. We have to be flexible in structure, find the investors where they are.

00:11:02:09 - 00:11:13:09
David Womack

And it's just going to be a challenging environment. As Rick said, when we first be in this panel, it was a different world. So stay tuned.

00:11:14:29 - 00:11:40:05
Arlene Bohner

Thank you. So now moving on to the next question. If you're on your computer, please go to the menu bar at the top of your screen, click the more button and holes. And that will bring up the remaining questions please click on question two and answer the next question. If you're on your phone, just click the X button in the top left of your screen and you'll see the full list of questions there.

00:11:40:08 - 00:12:43:07
Arlene Bohner

Click on question two and we'll get into jeopardy of using Okay. So this question was about issuance and where we think issuance volumes are going to be in 2022 can we put our answers up, please? And it looks like most people think that 2022 issuance will fall below 2020 and 2021 levels. Interesting. And that seems to be a pretty clear response here, Rick.

00:12:43:15 - 00:12:44:12
Arlene Bohner

Thoughts on that?

00:12:45:08 - 00:13:13:20
Rick Kolman

You know, I was looking at the various strategy reports that I accumulated in December. It was interesting when I looked at the volume forecast, it was anywhere from $440 billion to $550. And again, it gets back to what I talked about earlier, all this optimism going into this year about demand market's going to perform great. The view was taxable bonds, especially taxable advanced refundings, would really take off again like they did the year before. Clearly, so far this year, it's been a different market.

00:13:13:21 - 00:13:32:10
Rick Kolman

I think The Bond Buyer headline today kind of summarized it talked about how much volume is down. Talks about taxable issuance is down like 80%. So clearly volume is off this year. So I think if you look at the results here, there's a good reason to say that it is going to be less than last year.

00:13:32:10 - 00:13:48:24
Rick Kolman

And some guys I talked to in the Street have revised their forecasts to be $425 to $450, which would be less, but I think in the end and you know I think what the issues in the muni market have to really think about is really what Dave just said. You know yes credit spreads have widened. Yes rates have gone up getting where we are today.

00:13:49:02 - 00:14:07:00
Rick Kolman

But let's say we were where we were two weeks ago. You know Dave's point 100% accurate. Dave in the other day than in March Henning earlier still absolute rates are very low. And so if you think about infrastructure investment it's still the best way to go. And again overall rate if you look at the ten year average, you look historically it is still a great time.

00:14:07:01 - 00:14:15:03
Rick Kolman

So hopefully we get some stability in the market in the new money calendar, which has been very weak this year so far. We'll start to pick up and to prove everybody wrong.

00:14:16:15 - 00:14:40:21
Marcus Peters

Marcus But yeah, I would say, you know, just following up on to really record years of issuance, you know 2020 a record year in 20, 21, just down 1.9%. You know, obviously I think we are going to be in the current rate environment, you know, with 26 or 23% of issuance last year being in refunds. You know this number is definitely going to decline this year.

00:14:40:22 - 00:15:11:08
Marcus Peters

I think we anticipate supply to be about 10% lower than it was last year. Obviously, you know what could make supply increase a little bit. I was really hopeful. I think Emily Brock put a damper on my expectations for that Investment Act funding to come through this year. So kind of without that, we could see inflation increase, the costs of projects work, and then working their way down to local issuers which could increase the cost of financing those projects.

00:15:11:26 - 00:15:20:04
Marcus Peters

But we do anticipate overall that supply is down about 10% and okay.

00:15:20:10 - 00:16:25:04
Arlene Bohner

So we can move on to our next question. I think you all get the The Gist song go through all the instructions. This is a question about taxable issuance. So please select and note Okay. A clear winner here. Most 71% of people think taxable issuance in 2022 will be less than 2021 Dave, any thoughts on that.

00:16:26:19 - 00:16:34:27
David Erdman

Well I thought my first survey question was going to be what NFL teams Aaron Rodgers going to play out next year but that's the last one. Oh okay.

00:16:35:03 - 00:16:36:27
Arlene Bohner

Yeah we might get to that one.

00:16:36:28 - 00:16:53:13
David Erdman

Yeah. No, obviously tax for issuance is going to be down. Interest rates are going up and the use of taxable advance refund likely will go down. You know, the bomber had actually about taxable issuance dropping 80% in the month of February. You know, it's not going to be down 80% for the full year interest rate movements will happen.

00:16:53:23 - 00:17:19:00
David Erdman

And even though interest rates are going up, you know, short term rates are going up. So there's still an opportunity to complete some taxable advance is in the right interest rate environment. Looking forward. It may not help the taxable issuance this year, but I see taxable issuance be an opportunity going forward as issuers maybe leverage the infrastructure money they've received and do some development projects or some other projects that may have to use taxable finance rather than tax exempt financing.

00:17:19:11 - 00:17:32:08
David Erdman

It's not going to help this year, but it's something it could help in the future. Know question I have for for Marcus and Rick is just, you know, with the decreased volume or issuance in the taxable side, what kind of pressures is that going to put on the tax exempt market?

00:17:33:21 - 00:18:10:15
Marcus Peters

Yeah, I wasn't going to bring up football as an outcome of the 49 or Packer game. Didn't work in your favor, but it's a very good question and I think you know, we do see taxable issuance decreasing this year and I think it's a big shame in kind of a few aspects. Right. I mean taxable issuance has really led the conversation on ESG as we've talked about, as taxable buyers from Europe as well as nontraditional muni buyers have really used taxable municipal bonds to participate in some of the ESG conversation.

00:18:10:20 - 00:18:48:02
Marcus Peters

So I think a decrease in that can potentially slow down what would have been a very robust market in any ESG. So I think that it definitely kind of detracts from the overall conversation and is, as you know, from from some of your taxable issuances this year, I think expanding the buyer base to nontraditional buyers helps your bonds trade in the secondary, which leads to more liquidity, which leads to future prices, future lower prices for future deals So I think overall definitely kind of a negative impact for this for issuance and declining this year.

00:18:49:09 - 00:19:10:00
Rick Kolman

One thing I would just add is that on the taxable set, like this week, MIT is doing a transaction. Michigan, I think you're your higher ed institutions, your health care institutions, they're still going to be active activist. They're to look for opportunities when and because they can move quickly when they go sometimes a taxable route. So I think that market's going to be pretty stable, still be sound, but it's really going to be the advance refunding site.

00:19:10:00 - 00:19:33:09
Rick Kolman

And your question has it affect the meaning, the tax exempt? So like I said, we came into this year, people were thinking lots of taxable bonds. It would help taxes and performance. But again, what nobody expected was all of a sudden the retail see negative returns and all of a sudden the bond funds would be under pressure. So as I said earlier, once we get some stability back in, the bond funds kind of stabilized that's going to be the key to how, you know, our taxes and markets going to perform.

00:19:34:17 - 00:20:02:14
Mr. David Womack

Have Rick, I was going to say the same thing that you'll see. I expected the general municipal use of taxable is going to decline. Is the that was primarily reflected natural fundings. We did one a year ago in December. The opportunity was there. It was it was great. But we don't we won't do that very often. We typically include taxable in our new money transactions because they're primarily housing and that will continue.

00:20:03:02 - 00:20:25:18
Mr. David Womack

But the the higher institutions, health care, the more corporate type issuers that have a balance sheet need to do to do it. They can go out for longer to time that can go up 50 years, 100 years and put cheap capital on their balance sheet and do things they need to do without the restrictions, the tax exemption. I don't think that's going to go away unless risk rates go significantly higher.

00:20:27:02 - 00:20:49:18
David Erdman

And just one other comment before we get to question number four is as a couple in the last panel, here is a good reason why, you know, issuers need tax exempt advance refunding. I mean, interest rates have gone up and now our opportunity to refine transactions has dropped 80% in one month. Again, that's loss opportunities. A complete refinancings for debt service savings which results in higher taxes paid by by taxpayers.

00:20:50:03 - 00:21:09:27
Arlene Bohner

Sure. It's true. Yeah. Okay. Let's move on to question four, please. Talks about what we think will have the potentially greatest impact on credit conditions for state and local governments in 20, 22 over the next six to 12 months.

00:21:25:04 - 00:21:45:24
Arlene Bohner

Okay. Looks like the clear winner here is inflation at about 53% followed by federal stimulus at 28% Okay. I'm Dave Womack. What are your thoughts on this?

00:21:46:07 - 00:22:08:15
Mr. David Womack

I think this is kind of an interesting, interesting answer that folks think inflation is the, you know, be a big driver. And because that can come in a number of different ways when inflation raises it increases the and of cost pressure on labor, on capital projects, but also raises real estate values. It can raise sales taxes as prices go up.

00:22:09:28 - 00:22:37:24
Mr. David Womack

And I think by and large, the issue where credit is in a pretty good place, thanks to the federal stimulus, thanks to you know, incomes stayed pretty solid through the through the pandemic, you know, as an issue or one of the things that I think about and be curious about, you know, Dave's response, you know, as an issuer to me, labor pressure maybe the more the more pressing one, particularly in northeastern states that are highly unionized.

00:22:38:13 - 00:23:01:28
Mr. David Womack

They've had, you know, very low wage increases and union contracts over the last several years. And and I think that for a number of issuers, that may come into play in a way that it has not. And that could be tight. That's tied. That could be tied to inflation. And you could probably put those two together but, you know, I think when again, think of a of a big city.

00:23:02:09 - 00:23:29:03
Mr. David Womack

Another thing that comes to mind is, you know, pressure on the commercial real estate markets I think Pat McCoy talked about work from home and how that affects affects MTA. Well, you don't you know, as leases roll off, how you know, how quickly do people every year release their space? What's the use of sublease space? That's going to have a that's going to have a big impact on, you know, at least on urban credits that are reliant on commercial real estate.

00:23:29:07 - 00:23:31:14
Mr. David Womack

It's going to I think that will have a big impact.

00:23:32:10 - 00:23:48:17
David Erdman

Yeah, I agree. And I think the labor pressures also come from the federal stimulus. You know, I've heard the last panel is that, you know, issuers are going to want to do more projects and find the labor to help keep up with the supply chain with those projects are going to be a challenge. As for inflation, I mean, the one option that's not on here is, I think, politics.

00:23:48:17 - 00:24:04:13
David Erdman

You mean as inflation grows and we have to deal with inflation. How's the political atmosphere both in D.C. and within states? You know, going to address some of the inflationary pressures that are going to have to lead to some decisions over the next six to 12 months, potentially Great.

00:24:04:13 - 00:24:57:23
Arlene Bohner

Okay. Let's move on to question five, please. This one has to do with reading changes and will the trend of upgrades outnumbering downgrades that we saw in 20, 21, will that continue in 20, 22 please vote James okay. Your vote still coming in it looks like 56% are expecting relative balance between upgrades and downgrades and about 37% think that upgrades will outnumber downgrades.

00:24:58:23 - 00:25:28:25
Arlene Bohner

Very few people expect downgrades to outnumber upgrades. Okay. So as the rating agency person here I'll take first crack at this one. You know 2021 was was a year of of continued recovery after the roller coaster that was 20, 20 and now 20, 22 has some more uncertainty to it. That's undoubtedly going to play in to ratings at Fitch.

00:25:28:25 - 00:26:07:13
Arlene Bohner

We anticipate economic growth will slow in 2022 but we still think it's going to be above trend So that should be supportive of positive credit conditions. Of course it remains to be seen how those headwinds of inflation and rate changes and geopolitical pressures now that that we're experiencing how that's all going to flow through into economic performance. But there's still a large amount of federal aid that's still sitting on issuer's balance sheets and some more still to be disbursed.

00:26:07:23 - 00:26:51:05
Arlene Bohner

And those should also be a very important cushion as issuers are facing those headwinds for 20, 22 Fitch. Our sector outlooks are all neutral, which means that we think that the general operating conditions are going to be neutral. To what was a surprisingly strong 20, 21. So that was an improvement for some, particularly higher ed that at this time last year we had a deteriorating outlook for in about mid-year we revised that to neutral and transportation is also a change.

00:26:51:05 - 00:27:28:15
Arlene Bohner

So there are still some credits within the local government market that we think can be vulnerable, particularly those that are dependent upon business and leisure. Travel as Omicron, you know, is fading. If there are new waves that come, they'll continue to be vulnerable to those but we're anticipating fairly stable upgrades versus downgrades this year. So I think we generally agree with all the boats which have even more we're now up to.

00:27:28:15 - 00:27:37:27
Arlene Bohner

60% of people think that there will be balance between upgrades and downgrades Curious if our panelists have anything to add on that?

00:27:38:19 - 00:28:02:14
Marcus Peters

Yeah, I would say I'm definitely an optimist. I was hoping that we'd see more upgrades than downgrades in 20, 22. I think if you look at, you know, the US consumer in terms of GDP here in the United States, you know, 70% of GDP is consumption. While consumer confidence dipped a little bit in January and likely to dip a little bit in February, it's still very robust.

00:28:02:25 - 00:28:23:19
Marcus Peters

And so I think, you know, the strong consumer confidence combined with an employment situation, again, we're at 4%, you know, pre-pandemic, we're at 3.5%. So we're very close to full employment here in the United States. So I think the consumer is doing very well. I think how it impacts credit is really going to depend kind of credit buy credit.

00:28:23:20 - 00:28:52:18
Marcus Peters

You know, last question. We talked about inflation and inflation will hurt certain credits more than other credits. Obviously, look at the toll road, some toll roads being indexed to inflation will definitely help boost those credits if we see larger than anticipated inflation. Well, certain states like California with Prop 13 could experience larger rises in costs that don't end and, you know, don't outgrow their property.

00:28:52:18 - 00:29:09:18
Marcus Peters

Tax cap. So in that instance, higher inflation could actually hurt credit. But I think overall, I'm optimistic that in general, the again, the U.S. economy as well as the consumer is strong enough to to have more and more upgrades and downgrades so far in 2022.

00:29:10:04 - 00:29:15:06
David Erdman

Great. I would agree. And obviously in my issuer opinion, I think we should have more upgrades and downgrades.

00:29:16:26 - 00:29:18:14
Arlene Bohner

I will take that under advisement.

00:29:20:07 - 00:29:21:03
Marcus Peters

Give them one right now.

00:29:22:01 - 00:29:35:20
Arlene Bohner

Okay. Let's move on to question six, please. Going forward, will a growing focus on ESG factors affect the growth of ESG labeled or designated issuance in the next two to five years?

00:29:46:00 - 00:30:15:13
Arlene Bohner

James Okay. There's still some votes coming in, but it looks like most people, about 50% think significant acceleration in growth over the next two to five years and about 41% moderate acceleration and growth. So very few people think no impact on growth Dave Erdman, what are your thoughts?

00:30:16:00 - 00:30:38:27
David Erdman

Well, I like to see the moderate acceleration and growth. And, you know, I think the whole ESG topic over the last two years has really been a hot topic for finance. You know, this question is affecting the growth of ESG labeled designated issuance, which is pretty focused. Unfortunate. I think when you mentioned ESG in the commercial market, you know, I've I've used nine lanes of traffic in some of the other descriptions I've have is that from an issue is reflective.

00:30:38:27 - 00:30:54:29
David Erdman

We have just ESG factors that we have to disclose and provide information the rating agencies on in regards to what we're issuing the bonds for. So that's three lanes of traffic. And then we have the, you know, designated bonds as two. Are we going to issue designated bonds and what decisions we have to do as an issuer to do that?

00:30:54:29 - 00:31:12:03
David Erdman

And that's where we get to discussion about, you know, the benefit of having a green bond or a sustainable bond or so forth. And then the last three lanes of traffic is okay, we decide to go down that path of ESG labeled designated bonds. What disclosure or what promises, you know, what commitments are issuers making in order to do that?

00:31:12:18 - 00:31:30:07
David Erdman

And, you know, there's been a lot of discussion, you know, as to the pricing benefit, a lot of discussion as to there's a question about disclosure this morning that came up in those last three lanes. Standardization. Exposure is something that comes up a lot. And I don't really think there's standardization of disclosure as needed from an issuers perspective.

00:31:30:07 - 00:31:49:28
David Erdman

I wish we'd have better standardization as to what investors are looking for. You know, when they want to buy an ESG label, bond are looking to buy any bond in general. As for, you know, depositing that into any fund, you know, let us issuers know what you want. And that's where the standardization should probably be in that's where I would address that.

00:31:49:28 - 00:32:14:07
David Erdman

I mean, you know, as for disclosures, for risk factors, there's also the materiality and it's came up as part of the disclosure question. You know, it's not my quote, but, you know, it's a quote I herdsman I'll say is that we as issuers are writing municipal full disclosure documents. We're not writing People magazine. So, you know, make sure that you know, what we're talking about for cybersecurity, governance and everything else really, truly is material to what you're trying to write, what you're trying to sell.

00:32:14:24 - 00:32:28:28
David Erdman

And the last thing I'll just throw out there is, you know, with respect to the promise and the commitment as to what information we're going to provide. I was on a panel last week where an investor said they really don't look for designated bonds anymore. They just simply look to see where the bond proceeds are going to be used.

00:32:29:08 - 00:32:52:28
David Erdman

And they're hoping that issuers would take more time to follow up to say, you know, you said you're going to build a school, that you build a school. You'll understand that governments you know, don't have flexibility, that corporates do. You know, perhaps you may be able to issue debt and do whatever they want with it. But, you know, if an issuer has the authority to issue bonds to build a school you know, for me to issue bonds for a unit, University of Wisconsin-Madison, for example, I have like six levels of approval.

00:32:53:15 - 00:33:09:15
David Erdman

I can't say I have an issue bonds for UW Madison and go ahead and change that by going back through six holes of approval. So I think investors understand that, you know, the difference between corporate world and municipal world is a little bit different in that area. So I could talk all day about ESG, but those are the big key things I wanted to highlight.

00:33:09:23 - 00:33:12:13
Arlene Bohner

Okay. I think Dave has something to add.

00:33:12:20 - 00:33:47:19
Mr. David Womack

I mean, it's a very challenging space and it's a I think it's attractive for the issuer to think about doing, you know, separate the designated bonds from the disclosure issues because I think they are two very separate things. There's, you know, disclosure to the rating agencies, the disclosures that you're making to the investor market, irrespective of whether you're doing an ESG label bond, the idea of doing it, ESG level bond goes to how does how do you as an issuer function, are you able to to make the appropriate disclosures?

00:33:47:19 - 00:34:16:04
Mr. David Womack

Are you going to do something project based, you know, capital plan based? What does that mean? And then what does it do to your enterprise? Because there is a cost, whether it's a financial cost to get a third party opinion, there is a labor cost internally to to support that. And are you getting a benefit from it? And it's very difficult for those of us who issue mostly tax exempt bonds to discern whether that effort, whether the whether that enterprise is really worth it.

00:34:16:27 - 00:34:38:11
Mr. David Womack

And we'll continue as an issuer, we'll continue to look at it. But, you know, this is evolving. It's not clear where, as David said, where the investors are. What are they looking for from us? I think the thing we will probably spend more time in on is disclosure and making sure that we are telling the investor community, you know, our unique level of risks.

00:34:38:18 - 00:34:57:21
Mr. David Womack

You know what affects us because what affects us is different than what affects someone in California in Texas and Florida. So we have to be mindful of what we are selling to the market. We also have to be mindful of what we're telling to the rating agencies because their criteria are evolving. It's not clear what they're actually looking at.

00:34:58:02 - 00:35:07:26
Mr. David Womack

It may not be clear what they're looking at or what they're measuring. And and as we can interact with them and figure that out, that will help us all and help the whole community.

00:35:09:00 - 00:35:33:27
Rick Kolman

Yeah. The one thing I would add on the investor side and Dave brings up a good point about getting some direction investors, if you do look at the taxable market, I remember a conference I was at five years ago and major funds then had dedicated investment funds that putting together dedicated ETFs that they were putting together because whether it be the millennial, whether it be certain investors who had certain things in mind in terms of what they wanted to invest in.

00:35:34:10 - 00:35:51:29
Rick Kolman

And this goes back again five years ago and measured where it is today. So where we do, where we like to point what the issuers should do differently but clearly, what's very different is that the taxable side has taken much greater steps in terms of aligning funds and investment strategies that that line up to what they hear from their clients.

00:35:52:06 - 00:35:55:19
Rick Kolman

And we clearly, as they point out, we need a little more of that on a tax exempt side.

00:35:56:23 - 00:36:19:16
David Erdman

And one other thing I would try to bring up, I'm sorry for joint going twice. I use up some of your time okay. Is, you know, how can we, you know, address ESG and address the requests for information from the MSB. You know, a lot of smart people in this room, as was mentioned earlier, I really think as the ESG in the discussion that's going on right now, it's should be a market driven solution to resolve all these issues.

00:36:19:28 - 00:36:36:28
David Erdman

I don't think any sort of regulations that may come from the MSR, BS, RFA is going to help. I mean, I think more regulations from someone is only going to put a white wet blanket on the whole ESG topic. So I think it's on all of us as market participants to figure out how we're going to handle this ESG factor going forward.

00:36:38:02 - 00:37:00:05
David Erdman

You know, 12 years ago, 13 years ago, there was this big discussion about unfunded pension liabilities and how was the market going to deal with that. And I think, you know, I didn't have to feel like I have a fully funded pension program, but I think the I think the, you know, market really did a good job of coming together to kind of disclose that information so that, you know, investors could have the information they needed and was grab the information they needed.

00:37:00:14 - 00:37:03:06
David Erdman

I think that same approach should probably work here for ESG.

00:37:04:17 - 00:37:24:25
Marcus Peters

Yeah. And then from a kind of a market pricing perspective, you know, we really haven't seen the benefit kind of in the last few years of pricing a green bond or ESG bond. I think where you have seen a benefit, it's been really hard to discern whether that tranche was just larger and provided more liquidity or was it true kind of green or ESG impact?

00:37:25:04 - 00:37:48:05
Marcus Peters

You know, I think what will change and will really kind of move this issue forward is view things. If we have higher interest rates, it's a lot easier for an investor who manages a portfolio against a benchmark. You know, in August 2020, we had a 1.27% 30 year mmd. It's hard to give up five basis points against your colleagues investing in the green bonds.

00:37:48:05 - 00:38:09:22
Marcus Peters

I think with higher interest rates, that will kind of ameliorate some of that problem. Also, as I mentioned earlier, the taxable issuance, you know, it's going to be down this year, but that is really kind of move things forward. And then kind of lastly, I think it's just a demographic shift. You know, as Rick mentioned, you know, five, ten years ago, Europe and corporate market was really on top of this.

00:38:10:01 - 00:38:25:00
Marcus Peters

And, you know, our product being a tax exempt product, you know, once millennials start to get into their higher income years, we could see more of a focus from that specific demographic that will really push for ESG bonds. And that's what I'm hoping for.

00:38:26:15 - 00:39:07:28
Arlene Bohner

Right. Okay. Moving on to Question seven. Will technologies such as electronic trading, AI and machine learning play a larger role in the municipal market? Itself Okay. Well, very few people think that the municipal market is not a good fit for these types of technologies. Most people 53% think, yes, they will become a larger part of the municipal market in the next five years.

00:39:08:10 - 00:39:22:02
Arlene Bohner

And 34% say yes, but it will take longer than five years for these technologies to play a significant role in the municipal market. Marcus, what are your thoughts on this?

00:39:23:02 - 00:39:48:16
Marcus Peters

Oh, man, I think I agree with with no. One. I think in five years I'll be pricing bonds in the metaverse. So I definitely think technology has a huge role to play. You know, we're seeing it on the secondary desk in terms of alternative trading systems and auto bidders and artificial intelligence. All that is definitely picked up significantly in the last five years.

00:39:48:25 - 00:40:20:03
Marcus Peters

If you look at Mousavi put out a really good report from 20, 16 to 20, 21. If you look at broker, the broker trades or inner dealer trades, you know, 56% of those occurred on an ETS, although it was only 26% of PA. That's a still very large increase and I think now we have on top of just the electronic trading platforms, portfolio managers now have the ability directly through their portfolio management software to execute trades.

00:40:20:04 - 00:40:45:05
Marcus Peters

I mean this is within the last few years. And so a portfolio manager separately managed account manager to be managing a ladder see that they need bonds in 2036 click on that maturity. And all of a sudden all the dealer inventories populate for that particular maturity and they can directly execute. That is an example of, you know, technology that's really come to light in the last few years and I think that will continue to grow.

00:40:45:23 - 00:41:12:00
Marcus Peters

You know, also just from taking out kind of the issue or the market aspect, you know, it helps everybody. And mom and pop investors now have access to yield curves that they didn't, you know, ten, 15 years ago. I think that will continue to evolve and issuers have access to those yield curves. And speaking to Loomis today, you know, they have you know, software that now will custom build yield curves for issuers and underwriters.

00:41:12:00 - 00:41:18:06
Marcus Peters

So I think using big data. And so I think, you know, all this will come into fruition here in the next five years.

00:41:20:21 - 00:41:22:05
Arlene Bohner

Things really moving quickly.

00:41:22:19 - 00:41:47:20
Rick Kolman

I don't really have anything to add on that. I think you've said 100% correctly. We've seen a huge evolution. You see it in the secondary market. You point of portfolios being put together. That is definitely been on the increase, both big and small investors. I will just say the one thing about a market, you know, which which will allow still for human involvement is let's not forget that that that more than half of the deals that come to market are less than 10 million.

00:41:47:29 - 00:42:07:08
Rick Kolman

So that's kind of hard to to to really handle from a technology standpoint. So I think you're going to have a little bit of a little bit of each. If you're a big program issuer coming to market quite often, I think that's a different way. Maybe technology can be leveraged in your bond financings versus someone who's doing a $10 million deal or less always relying on the bank qualified investor or somebody local.

00:42:07:08 - 00:42:10:13
Rick Kolman

So I think you'll see just a difference in the markets moving forward.

00:42:11:07 - 00:42:35:06
Mr. David Womack

You know, I I'd have to echo what Rick said. Just think of the volume of issuers have distinct issuers we have in our market and what they and what the credits are. You know, we're in a story that has four different credits. You know, there are thousands of credits in our market and it's hard to make, you know, to make judgments about what you should buy, what you should hold, what that price ought to be.

00:42:35:18 - 00:42:57:12
Mr. David Womack

It's hard to it. Maybe it will get there. And, you know, there are advances in technology and machine learning that will that will make that process easier and actually maybe help those investors and help those issuers by creating greater liquidity. But the breadth, the sheer breadth of our market and the lack of standardization of our product is going to make that is going to make that challenging.

00:42:57:14 - 00:43:13:00
Mr. David Womack

I mean, I can still remember when a cousin of mine, you know, when she realized I had I was in the mutual bonds and said, oh, I own these bunch of bonds, you know, what are they? Yeah, and we spent we spent 3 hours going through every bond she had. So I, I like this is what this credit is.

00:43:13:00 - 00:43:30:09
Mr. David Womack

That's what that one is. Oh, you don't want that one. Yeah. And so you know, maybe we will get there from a technology standpoint and if we can maybe again, that helps investor liquidity and helps parties that people participate in the market because there's, there's greater transparency in price.

00:43:30:22 - 00:43:45:03
Rick Kolman

And I'm pulling a day here to go twice the just remember one point I brought this up at a conference or actually the internal media and I said, you know, the corporate market does a trillion plus of new issues with less than 500 deals we do for and 75 billion with 13,000.

00:43:46:26 - 00:44:06:28
David Erdman

And the one technology I just want to highlight is the Msbs system. You know I kind of was not too happy about the RFI but kudos to the Saab for Emma. Emma is a great technology that has improved here recently. To make some more enhancements to it, I mean that is just a technology as has issuers use in order to make sure we get the information out to our investors.

00:44:07:10 - 00:44:09:13
Arlene Bohner

And I think everyone uses that. Yeah.

00:44:10:09 - 00:44:11:17

Marcus Peters

Final break.

00:44:12:22 - 00:44:58:28
Arlene Bohner

Okay. On to our last question. Number eight What will have the biggest impact on the public finance industry in 20, 22? Please vote James. Okay, so the clear winner here is ESG at 48%, followed by inflation slash rising interest rates at 32% and then evenly split among the others. Except no one thinks issuer credit changes Well, a big impact on the finance industry.

00:44:59:04 - 00:45:06:13
Arlene Bohner

I don't know what that says for me, but that's your job anyway. Dave Womack thoughts on that?

00:45:06:14 - 00:45:33:05
Mr. David Womack

Sure. This year, given the developments in the last couple of weeks, this is a really interesting, I think, result. Yeah, I agree. With you. I think, you know, we looked at the inflation slide earlier and I think because of its impact on interest rates and our issuance pattern, how much how many bonds come to market, the interest rate to pay is a direct impact on our market.

00:45:33:05 - 00:46:00:27
Mr. David Womack

I think ESG is it is I don't want to say a sideline, but it's a secondary factor. And because we as they talked about before, there are clear disclosure issues and that are going to that are raised by that sector. But as a direct impact on the industry itself, I would have to attend more to, you know, do inflation due to inflation and, you know, general economic conditions.

00:46:02:02 - 00:46:25:22
Rick Kolman

If I had to put the investor hat on for a second, I would hundred percent agree with Dave and I. I'm really challenge to see how well the investors I know would make that. The priority, I think would be some combination of three and four right now. You know, again, if you think about why you had all those outflows, all the bid wanted nothing to do with ESG, you know, had to do with concern about rising rates and where rates were going, etc..

00:46:25:23 - 00:46:33:16
Rick Kolman

So I find it interesting that that's where the group is. But again, if I was an investor, I don't see that as a big factor in there in their thought process.

00:46:35:27 - 00:46:41:27
David Erdman

Yeah. I'm just curious of the other responses is that the Aaron Rodgers and NFL team you bought in.

00:46:41:27 - 00:46:42:08
Mr. David Womack

Their.

00:46:44:18 - 00:47:09:07
David Erdman

But no, obviously inflation, rising interest rates is something that's going to have impact on on the public finance market. I agree. Issue is a sideline item. There one topic that you know is out there. I think a lot of large issuers have dealt with it. I'm still a little concerned about smaller issuers is, you know, LIBOR, you know, is something that's going to come up and be nasty here in 2022 is that you know goes away hopefully maybe.

00:47:13:19 - 00:47:41:23
Marcus Peters

And then in my mind definitely for you know I look at Federal Reserve policy you know as a municipal underwriter having having the largest impact in 2022 you know and you know one thing we really haven't talked about today is you know the balance sheet unwind right. And when we look back at the taper tantrum of 2013. You know from the time that was announced the Fed balance sheet at 4.5 trillion took better part of a decade to get that to 4.3 trillion.

00:47:42:07 - 00:48:12:07
Marcus Peters

And when the Fed governors talk about normalization of balance sheet you know what does that mean we're at 8.9 trillion as I mentioned. So to get anywhere close to pre-pandemic levels of Fed liquidity, it's going to take some more than balance sheet runoff. So I think that conversation that's going to be evolving over the next several meetings is going to be very important because obviously that impacts interest rates, which impacts supply demand.

00:48:13:04 - 00:48:15:20
Marcus Peters

And so I think that will have the largest impact on the market.

00:48:16:28 - 00:48:45:23
Arlene Bohner

Great. I'd like to invite anyone who did answer other to share with us what you think the biggest impact is going to come from anyone willing to share everywhere, what, 6% I don't see any hands up. No one's no one's fessing up. It must have been the football. Yeah.

00:48:46:09 - 00:48:46:17
Marcus Peters

Well.

00:48:47:00 - 00:48:51:19
Rick Kolman

Let's no one's interface up then we have to have Dave tell us, where is Aaron Rodgers going to go? What do you think?

00:48:52:19 - 00:48:55:27
David Erdman

Aaron Rodgers will not be in Green Bay next year. Okay.

00:48:57:05 - 00:49:19:02
Arlene Bohner

Well, with that I think I would like to thank our panelists for their insights today and thank you to our audience for your great participation. In the early and the reporting of this that will be in the Bond Buyer soon. And I think I'm supposed to let you know that lunch will be on the third floor.