Examining the new normal in the current rate environment: volatility, outflows, widening spreads
Broadening of the investor base
ESG sustainability analysis: would investors charge a penalty or pay a premium?
Transcript :
Devin Phillips (
Good morning. So we're going to talk about the buy side today folks, and it's an important topic, what's going on in these folks' minds and a couple of other things that we're going to cover as well. So Randy Gerardes with Assured Guarantee. Leslie Martin with Cavanal Hill, Neil Crabb with One Oak Capital Management and David Blair from Nuveen. We're really happy that we got all these folks here today. I want to jump into it because we've got 50 minutes and I want to save a little time for Q&A. So with what we've got going on in the environment, it's been crazy. You got some weeks that are great deals get done well. Some weeks that are not great, they don't get done well. Price adjustments, I mean it's just all over the page. I think the one thing that has helped us more than anything is the fact that our issuance is down about 29 and a half percent this year, which has made us a little more tolerable for the buy side. But we're going to talk a little bit about ratios and how rich they are and when the buy side just stops buying and I think all of us in the room need to understand that being involved in issuing bonds and selling 'em to these folks, we need to understand their mindset when they're going to buy, when they might not buy. And we're going to kind of get into that. So first things first, let's start with Randy and I was at a convention three or four weeks ago and there were a couple of large buy-side clients that were ensuring large positions in their portfolios and for future liquidity events, things of that nature. I just wanted to try to get some insight on maybe what all is behind that. So let me start with you on that.
Randy Gerardes (
Sure. Okay. This is thanks to the Bond Buyer and my panelists and Devin for putting this together. Really appreciate the opportunity for us, it's really been an interesting sort of situation that's occurred. If I were to take back to 2021 on the secondary side, we'll focus more on that. Obviously our bread and butter as a Bond insurer is ensuring primary market transactions, but on the secondary side, what we saw from 2021 into 2022 was pretty stark just for number sakes. In 2021 we did about 437 million in secondary par wraps. Okay, last year we did about 3.3 billion and so that's a pretty substantial increase. So what was really driving that right at the end of the day, people were expecting rates to move up perhaps. I know my background, I've been on the sell side, I've been on the buy side and now sort of an intermediary here at the short and I've been talking about rates going up for at least a decade. So at some point they have to go up. So they finally started to go up and they went up pretty quickly. They're 525 basis points or whatever it was in a year. And so what we saw was sort of the lower coupon bonds that were less liquid, less attractive. A lot of the buy side firms were coming to us to wrap these bonds. And so what we saw is for liquidity purposes, obviously you get the rating improvement, you get the increased investor base now that you have a higher rated bond and you have the guarantee from Assured Guarantee. But we also saw a lot of folks looking to just improve the liquidity of their overall portfolio, looking to sort of address their duration mismatch in their overall portfolio. So we saw it as a portfolio tool for a lot of our buy side folks. It was 30 different firms that we worked with to ensure those 3 billion in the secondary. And so we've really seen folks really kind of honing in on that. Now in 2023 it's been a little less. So I think we've seen people becoming a little more, I don't want to say comfortable, but kind of understanding maybe we're coming to the end. And so people are a little less to pull the trigger on some of these, the trades that we did in the previous years. But at the same time, who knows what's going to happen As a research, former research analyst, I can't help but give you sort of the opinion and I just think it's amazing that we've raised rates 525 basis points and we still have inflation and we've managed to almost destroy a few banks along the way. So the question is, I guess from my sort of seed I wonder is how far is the Fed going to go here and what else are they going to break before they get their sort of dual mandate under their control? Now these folks to my right probably have a better idea on that, but it's really interesting just kind of where we are in the overall sort of cycle. So we've had a great year in the secondary market last year again because of folks on the buy side trying to streamline and stabilize our portfolio and we'll see what happens in 2023. I think we're in a transition year. So I'll stop there and pass it back to you Devin.
Devin Phillips (
Thank you. So let's just kind of go into the reasons that drive your decisions on a weekly basis. And David, let's start with you. How much do ratios play into your thinking process? Are there times you're just moving away from the market? Does it really affect it that much? I mean give us an idea of what goes on with you.
David Blair (
Yeah, there's a lot of different factors. Ratios is one data point. The thing about ratios is that they can trade in what might look like a certain range that's say expensive for some time, but they can stay there for a very long time. They can also change quickly because of events in the treasury market. So when we talk about ratios, it's yields of munis relative to yields on treasuries. So it is sort of a reference point in one reference point in regard to valuations on Munis ratios today are, they're pretty, what you'd call rich. The percentage of yield as that of treasuries is historically pretty low, but there's still a lot of demand and so you can't really base it totally on ratios. Some of the other factors are other evaluation metrics versus corporations corporate credit as well. You've got some buyers who are crossover buyers in the market and some insurance companies, which that's about around 15% of the buyer base that is looking at not just Munis but other options of where they can put their money. So that is a reference point as well. But some of the other key factors are just how much cash we have coming in, how much cash we need to put to work investors particularly, and I'm talking about SMA portfolios, you've got some flexibility in terms of timing of how you put that to work. It doesn't have to be put to work immediately, but we're kind of looking at, okay, what's the visible supply over the next month? And right now it looks like it's finally picking up. We've as was mentioned, we're running at about 30% year to date below last year and last year wasn't that great either. So supply has been a big issue and if anything it's the big effort is trying to get money to put work in a sensible way. So what we're often looking at is when new issues come is we're comparing them versus other deals that have priced that are pricing in the same day or that priced yesterday or recently and it has to look like it makes sense relative to that or we'll just hold off and go somewhere else to another deal. And then on top of that, it's happening in the market right now. So you can have a particular morning where there's data releases. We know coming into the day that there's an inflation report and typically that gets brought out very early, but we're going to wait to see what happens there and if the tone of the market goes completely against us or gets very poor, we'll pull back on a deal that we might otherwise have planned to go in on for more size and looking for cheaper levels. So I'll stop there, I can go into more depth. I know we're sort of limited on time, but there's a variety of factors that are a combination of factors that are more intermediate term in nature in terms of what we see as opportunities over the next few months or the next month versus what are the demands today regarding our cash that needs to be put to work where we are looking to put it to work. Some deals, I should say that depending on how they're structured that can drive the demand. Right now there's a lot of interest, particularly further out the curve in that 13 to 20 year range. There's particularly strong interest there from intermediate type SMA investors and there's just not been enough supply there. So those have been oversubscribed almost every deal for the last week, number of weeks. So if a deal comes that's pricing very lightly there, but more on other parts of the curve that might look very different in terms of how it gets done versus another deal that is more focused on the higher demand areas of the curve.
Devin Phillips (
Okay. How about you Neil?
Neil Crabb (
Good morning. Yeah, we definitely look at ratios and to pick our spot on the curve based on the ratio we run a hedge fund and also have SMA strategies. So it depends on what we're doing in each strategy. I think another reason the ratios have remained so low, not just because the supply issues is because absolute yields have just been much better than they've been in years, like Randy was saying. So people are buying Muni bonds and we're getting a lot of influence into our SMAs and also into the fund. So we're definitely picking our spots on the curve, like I said, and we have a lot of a mass, lot of money to put to work, but there's been no mass paper. So we've been buying other states that represent value for those people. Obviously we want the yield to represent value versus buying an in-state mass bond but been finding value outside of state specific strategies and just buying, been very, very picky on what we're buying lately just because of ratios where they are. Because I mean you look at the past 20 years, ratios seem to always go back in line to the mean. So at some point they will. And I guess what's supply picking up? And I thought it'd pick up in March, but obviously it didn't. So if it does pick up this month, I guess ratios might back up a touch. But again, with actual yields where they are, it's it's going to be tough for them to back up too much I think.
Devin Phillips (
How about you Miss Leslie?
Leslie Lukens Martin (
Well, to be a hundred percent honest, we haven't been buying a whole lot since ratios have been so low. I saw some chat this morning about if we have the mandate to stay in tax free bonds, if we could buy Taxables, that would make absolute sense. But we are SMAs only and tax free. So we are putting cash to work, we're looking to extend duration expecting rates to come back down at some point, but we don't necessarily think there'll be a cut this year. But as far as sectors, and we're gone back to all sectors, we were kind of avoiding healthcare in airports and all of that after the pandemic and seeing how things recovered and we're back to purchasing all sectors and single A credits are kind of our wheelhouse. I guess. I'm trying to think of the sweet spot, what we tend to pick up just because it gives yield, but like Neil said, the absolute yield, I mean with the curve inverted, I hate the inverted curve, but I pretty much just am like 3% across the board. Anything is good but it's hard to find that at this point. But we are buying but significantly less than we were because we're just kind of on the wait and see wagon to see if ratios do improve.
Devin Phillips (
I get it. It's a tough environment folks. So let's talk a little bit about as we move forward, we know the banking crisis, we know the commercial real estate potential problems there. I mean when you're making your buy decisions, the deal's coming every week, are there any specific risks that you're looking for to stay away from pension ops, whatever? How much does that play into your decisions, David?
David Blair (
Yeah, sure. So there's a multitude of risks. I'll kind of go down as much as quickly as I can. So there's the structural risks. There's kind of from a bond standpoint, coupon call structure based on our outlook for the economy. So in a market like today, it's much more, it's recovered quite a bit from October last year where you had a lot of 4% and even some 5% coupon bonds trading below par, that's a problem. It can be a problem because not only is it a reflection of the fact that the price has gone down, but it goes down and your duration extends and you take bigger losses. So it's something you want to typically avoid. You'd rather buy it at a discount, not go from premium to discount. And so we're thinking about structures like that relative to our investment outlook. From a rating standpoint with SMAs, typically these are a or better in terms of ratings exposure, we invest below that but not in SMAs in some of our other vehicles. So credit is very important in terms of the sensitivity, what you're thinking about healthcare airports. And we are the pretty much the same way coming out of the pandemic, we're very cautious around those sectors waiting to see how it evolved. A lot of the federal aid clearly helped buffer those and they've airports have recovered very, very well. Generally speaking, hospitals we're opportunities there. The spreads have widened pretty significantly over the last year, but there are still opportunities where you've got well run hospitals that I think are positioned to weather the challenges that sector is facing right now among them is their labor costs and nursing shortages. So structure credit, those are a couple of main risks. And then we're ultimately trying to manage the duration of our portfolios to our targets. So that kind of drives where we're buying for particular portfolios on the curve and the structures that we're buying too.
Devin Phillips (
How about you Neil? What kind of risks are you trying to weigh into your decisions?
Neil Crabb (
Yeah, I mean buying bonds at a discount and let them go to a premium is okay if you're long only, but if you're in a hedge program it can be quite difficult. But also mine taxable bonds or shorter calls is very difficult to hedge as well. So we're looking at that type of risk and credit set. We know we value and hedges them appropriately. We're not using a ton of leverage just because our funding costs now. And I think that's a conversation a lot of people are having at this point. But like I said, we're very selective on our credits. We are buying credits and secondarily insuring them with AGM or BAM if it represents value based on what we think the bonds are worth after they're insured. So it really just depends. We are buying farther out on the curb because again, ratios are better there and we do see value. We're also buying smaller deals. We feel we can get much more spread there and not give up credit quality. So it means trade by appointment. We look at every deal on its merits and make a decision at that point. But yeah, like I said, we're particular right now and just we'll see how the supply comes in and look at one deal at a time.
Devin Phillips (
Okay. Ms. Leslie,
Leslie Lukens Martin (
On Neil's note about smaller deals that's another sweet spot that we tend to hit the even deals that are less than 10 million muds, small towns, cities, those have been great because we can put those in SMAs and there is some spread there because the big guys aren't really looking at those deals that won't even move the needle on the cash that they hold. I was going to comment that when the PSF closed for a bit, we were actually pretty excited because we thought we might get some yield on Texas school district paper and we were so excited about that and did not come to fruition because demand is there and the supply was not. So even the deals that came without the PSF wrapper were pricing pretty close to as if they had the PSF. So there was no buying opportunity there that we were really hoping for. That's we stay about 12 years and in. So as far as I mentioned, trying to extend, we're still not going out too far and credits that we believe might have challenges like pension issues or Illinois Kentucky, things that have state level pension issues, we stay shorter on those.
Devin Phillips (
Got you. So look, we all know about the volatility. I think there were a hundred and over 180 some odd days last year. The interest rate swings are more than 10 basis points in a day. And I've been doing this for 40 years and I haven't seen that before. A lot of ones, 2%, 3% coupons issued back in those days. We talked about Randy earlier about insurance, some of those to try to help the values of that but minimus problems. And a friend of mine said that's not a town in Georgia. It's actually a tax calculation. So those are struggles that everybody's got to fight through. I don't know how much of that paper you guys own in the long end, but obviously it's going to be a tough road to get through that. So in the volatility, and Neil, you brought up hedging just why don't more of an active trading account, give us an idea what it's like for you to hedge these days. What kind of percentage hedge are you using? I mean I remember when I hedged they were trying taking the basis point value of my trading inventory and trying to get it to match on a hedge a hundred percent and all I did was lose money, so we had to leave that program. But are you a 20% hedger? Are you more than that? Can give me an idea of what you're doing there?
Neil Crabb (
Well, in the last 40 years the market's done nothing but go down and yield. So I can see how that's losing trade if you're a hundred percent hedged there might have changed now is my guess. But yeah, we generally run anywhere from a 50 to a 70% hedge using a blend of instruments. On the credit side, we use rate locks, which aren't great, but there's not many choices for credit protection on the muni side. And we also use puts and puts on treasury futures and cash treasuries. So we try to use, like I said, a blend depending on what we think rates are going to do. We were heavily involved in options when the treasury market went down and yields substantially over the past few weeks. So it's helped us. However, as it backs up, they are less sensitive to the market so they don't help you when the market turns around a bit. So we try to be very active with the hedge and trade it, especially on the option side and active on our cash bonds as well. So it seems like that's the best strategy in this type of market, especially with the ratios where they are. So, it's certainly an art form out of science on the Muni side, but that's what makes it exciting, right?
Devin Phillips (
Yes. Exciting
Neil Crabb (
David, especially last year. Yeah.
Devin Phillips (
So David, do you guys do any hedging?
David Blair (
Not in the SMA portfolios, but in our mutual fund portfolios there's hedging used and I just echo what Neil's saying, I won't go into the details and then I'm not directly involved in it, but it is a difficult thing to do and you can see it in the dealer community too. It's actually influenced at times the amount of inventory they're willing to hold in munis and it affects liquidity in Munis when you can't hedge your Munis as effectively as you want. So just when you really need that hedge, when volatility picks up, it often can because of the basis risk between munis and treasuries can really hurt you. So it can help you, but it can hurt you in certain environments. So the way we in SMAs approach volatility is just being mindful of the liquidity of the bonds we're buying, you know can go for yield, but there's often giving up liquidity, there's liquidity premium, that's why the yield is higher. So we're mindful of that and we want to make sure we've got appropriate liquidity in the type of market where liquidity seizes up and there's outflows it, volatility can beget volatility if it's around long enough, it tends to cause mutual fund outflows like we saw last year, that was a prime example and we saw about 150 billion go out of Muni mutual funds last year. So you can really start a trend and if you've got liquidity and you can be a liquidity provider in particular to the market, essentially buying bonds that other people need to sell and you're buying them at cheap prices, it's a wonderful opportunity, but it's hard to be that way if you're not kind of positioned conservatively when these things happen. So it's a little bit of a balancing act, be opportunistic, maintain liquidity with bonds that you can sell more easily and not take as much of a hit on and redeploy it in better opportunities.
Devin Phillips (
Yeah, makes sense. So let's move on a little bit another, I was at a BDA conference two or three weeks ago and was one of a major buyer was there and they were talking about their AI system and how it's taken over everything under a million for them, a million bond block size or lower. I remember at a former firm when we started this back in the, I guess it was the early two thousands, we came up with a computer bidding system that we had to populate the information, but for the sheer flow of the bid one, I mean I was physically bidding 1500 items a day, managing 1500 line items, just the sheer volume of it, you just didn't have time to do it. So we developed a system that would bid it, re-offer it on three different platforms and put a hedge on, but it wasn't intelligent. We had to populate it and keep updating on a daily basis, but it did handle the massive flow of odd lots and smaller pieces. Anyway, AI is the next generation of that, it's a thinking program and it learns and it can learn fast. They're using it to handle everything under a million. And I'm just curious as to, are you David, I'll start with you David real quickly. Are you guys looking into that? Are you using anything like that currently? Because I know you guys have probably got quite a bit to deal with on that front too.
David Blair (
Yeah, we're not employing that currently. It's something that we're talking about internally. It is something that's evolving in the market. The market is incredibly fragmented. There's thousands, tens of thousands of issuers is very inefficient. And how you create a program that effectively allows you to take advantage of opportunities that's, I think that requires a lot of proper thought that goes into that. So I know there's efforts being made in some parts of the market and we will probably hear more on that going forward.
Devin Phillips (
Yeah, I mean Neil, I don't suppose you guys have reached that far yet, right? You were Leslie?
Neil Crabb (
No we've developed a proprietary system that bids bonds based on evals. We do get calls from vendors, they say they got the best AI technology that can create the best eval. But yeah, you have a million CUSIPs out there, it's very hard. I would like to think that we're better than the robot, just good old fashioned experience and pricing bonds. But again, I'm not so arrogant to say that I might be replaced in a few years by a robot. I certainly hope not, especially for our industry because I think we're one of the last industries that is still relationship oriented, a people business and I really like that about my job. So I hope the robot doesn't replace us too soon. But yeah, I mean you can't think it's something you can avoid. I mean you have systems out there that can analyze millions of data points in a millisecond with no emotion. It's fascinating. And at the same time it's very scary on multiple fronts. So we're certainly looking at it. I know it's going to develop and it has developed at a very fast pace, but, and it might be ultimately be really beneficial to the Muni market as far as pricing bonds as it develops, but that's to be determined in the future.
Devin Phillips (
It's one of the comments that was made about the system is it can go into all the electronic websites and everything and it canvases all of it and if they need to add to a position or money to go to work, but this is a thinking system, it learns. So if it pays too much for something, it's going to figure that out on and on and on. I've been in the camp of, you can never commoditize municipal bonds because they're just too different. This is not commoditizing. This is actually getting to the value of what this thing thinks it's worth and it's using more, it's using a, let's call it an instinct, gut traitor type approach because it can learn, which is going to be interesting to follow, but people are using that. So let's ask a quick question. Pension obligations, operating budgets, these are things you guys pay a lot of attention to, correct. All right. Everybody's on board with that, so we keep that in mind as far as cash goes. Are you keeping more cash on the books right now than you have in the past, Dave?
David Blair (
No, not again, we're running portfolios for clients that really want their cash to deploy their income investors. So you have to vary if you're going to hold higher cash levels, you have to communicate it to them because they're expecting income. There has to be a very good reason that you're giving up income because you're going to, that opportunity cost is going to be covered by what you pick up by waiting. And so you have to be right on that. It's a little bit of market timing, so that's very difficult to do. So we're really not trying to, cash levels are not intentionally increased except in certain extreme situations where there's clear market risks that are highly uncertain and can lead to varied in widely different outcomes. There we'll have client conversations with clients. Sometimes we'll tell them don't invest it all right now, it's a good idea to do it in tranches over a period of time. So those are conversations. Once we get the money though, we most typically are just very methodically putting it to work where there's opportunities. Okay.
Devin Phillips (
How about you Neil? Being a more active trader, are you keeping more cash around?
Neil Crabb (
Yeah, like I mentioned on our hedge fund side, we are, we're certainly less levered than we usually are just because of the funding cost and we're more active than we generally are. We do have some legacy positions that we, on a very nice yields that we're maintaining. So we're definitely making money on the carry in the portfolio. On the SMA side, I, I'll say this, I'm much more comfortable sitting in cash making 4% than I was a couple years ago. So however I know that could go away very quickly. So it's kind of a balancing act for us, want to deploy the cash for our SMA strategies is based on sitting on it and what we think the Fed's going to do in the future. But yeah, we methodically also like to put it to work, but I think we can afford to be a little more selective than we had been with the cash because it is earning money just sitting in cash.
David Blair (
Yeah, it's actually, just to add to that, that's a good point On the cash there, there's has to be a conversation that we have with understanding the client's custodial sweep and how that's invested because that is true in some cases clients are earning a lot just by sitting in cash and so you have more flexibility there, but sure it's not always the case depending on how they've set up their account.
Neil Crabb (
Yeah, actually we talked about that earlier this morning and I won't mention any names, but some of our custodians, they won't automatically sweep the cash into a money market fund and they won't let you know about that. So you could be sitting in cash making zero and the other custodians automatically sweep it into a money market fund where you're making 400 basis points. So yeah, that's a difficult situation.
Devin Phillips (
So make sure your cash is getting swept.
Neil Crabb (
That's exactly every everyone's cash. Make sure it's sitting in a good money market fund because you just want to be double check in your personal investments.
Devin Phillips (
And Ms. Leslie, are you sitting on more cash?
Leslie Lukens Martin (
Well our strategy parameters require, I mean they have a max cash position, but I will say that we are using VRDNs more maybe longer to get fully invested. We're just using VRDNs as a cash equivalent and then as we buy fixed pieces out longer selling the VRDNs to cover the settlement, but it, it's probably taking longer to invest new accounts than in the past because we're being picky and patient to get yields as we try to extend the duration. But we're also seeing accounts built in segments. They might do a quarter of the total target, but we have an idea of where it's going to go so we can kind of adjust what piece size we put and then when we need more cash we can let them know or when we're ready to invest more. So that's been a good practice to, we know kind of the target of what the entire account's going to be. So we don't have tiny pieces in what's going to be a big account eventually, but it's not all the cash at the same time. So it gives us some more time to find pieces that we think provide sufficient yield.
Devin Phillips (
So you know what, I got one more question and we'll hold out for some questions from the audience. Taxable issuance off 50% this year. I would assume that I've seen unusual participation some way up and some just mediocre, but appetite for taxable munis, do you guys find this as an opportunity to buy some bonds or Dave, what's your thought on the taxable side?
David Blair (
Yeah, so it depends on the mandate. So a lot of the SMA portfolios we run are purely tax exempt, so they cannot participate, but taxable munies are really cheap right now. When you look at the after tax yields of tax exempt munies to taxables, taxables look really attractive and taxables relative to similarly, rated corporate bonds are, it's also attractive. So taxable munis, they present an opportunity I think for investors who have the flexibility to invest across different taxable fixed income sectors. And then when you look at just the inherent benefits to it, putting aside the relative valuation, it's a lower risk investment strategy versus a lot of corporates of the similar rating. The default history is much different. Correlations with other sectors is lower, particularly with equities is very, very low. So it's a great way to diversify, get attractive after tax return and also have safety in your portfolio.
Devin Phillips (
Neil?
Neil Crabb (
Yeah, we like the taxable muni market. I think spreads have kind of just twisted in the wind because there's been no supply and nothing driving the market to go tighter. There's just been no bonds around. But we certainly been buying deals that have come to market lately. We bought the Georgetown deal and participated in your Donna deal. So yeah, we definitely like that sector of the market. We think it's going to tighten and we're certainly looking at it.
Devin Phillips (
So you'd like to see a little more supply?
Neil Crabb (
Definitely to see some more supply. We like the index names and again, they haven't been coming but they will.
Devin Phillips (
Do you hear that Chris?
Randy Gerardes (
We'd like to see some taxable issuance as well on the bond insurance side. I mean if you look at our premium production in previous years, over half of our premium came from taxable bonds. And like you guys said, and even in a former life when I would talk to you guys as a sell side research analyst, you just look at the spreads relative to corporates, they're pretty attractive. But at the same time the issues are saying we see higher rates. So with ratios where they are, they're issuing tax exempt. So you see that, you don't see that, sorry, you see that paper from our perspective on the taxable side, you have a lot of different investors that are involved, which is good and bad from the bond insurance side in that they're not as familiar with bond insurance, but at the same time they're not as familiar with the underlying credits. So we've done a tremendous amount as by our premium production, taxable healthcare for example. We've done quite a bit of that. Transportation issuers have also issued taxable and I think the Build America bond program of yester year really kind of was the exposure to overseas investors. If you look at kind of, it's not a huge number, I used to track this, but you see the overseas investors that are buying muni bonds and they weren't even getting the tax exemption, but when you look at yields globally, this is going back a ways as we've seen rates change, but they were getting something more than zero was worth it. So if you're sitting in Germany or something, you're buying tax exempt munis, you're getting no benefit from the tax exemption, but you have a positive yield. So we would see these investors coming in and I talked to them and said, well, why are you buying munis? Well, because I can't get any yield in my home currency in my home country. So we would like to see a lot more taxable bonds more spread for US investors that are looking for credit protection because they're not as familiar, they recognize that taxable immunities are less liquid. And so again, our product makes a lot of sense. So we would also like to see some more taxable, we'd like to see more supply in general with wider credit spreads. And frankly, I'd like to see more volatility. I'd like a lot more volatility, wider credit spreads and more issuance. So if you guys can make that happen, that would be great.
Devin Phillips (
Well, there's still a lot of two and 3% coupons out there.
Randy Gerardes (
There is, and there's even some zeros falling around as well. And we've actively tried to raise our hand and say, well, we'll participate. A lot of times though there's no trade being done at all because the oh one is just doesn't allow it. So they just, they're just sitting there. And so a lot of times there's an inertia to a certain extent, especially when you're volatile market, sometimes people aren't willing to do anything because they're trying to see where things are going to shake out. You've heard people extending duration, talking about extending duration now last year they were like, we are not trying to extend duration anyway. So you can see how quickly things are overturning. The one other thing I wanted to add on the previous question if I could, was just one of the things we're spending a lot of time on and hasn't come up in this panel, maybe we don't have time for it, but is ESG, right? We are at a short, and unlike my fellow panelists, we cannot sell, right? We're irrevocable for 30 years. And so we're looking at beyond the next 3, 4, 5 years and looking at what's going to happen with climate change, sea level rise and all of that kind of things. And so we're spending a lot of time looking at that. Investors on the other hand are some in cases looking at the benefits associated with ESG. Now whether they're paying up for those benefits, we can have a debate about that because I don't think they are, but it's definitely something that's spending a lot, we're spending a lot of time on and we are a risk arbitrage, credit risk arbitrage shop. That's really what we do. And so we spend a lot of time thinking about credit risk and looking at some of the sectors that were talked about before, healthcare being one that we've been active in. Because again, there's this idea that credit spreads are widening and we're looking at opportunities where we can see a deal that maybe the market doesn't love as much and we can provide our product to the market. So we spend a lot of time talking about credit risk. If I showed you guys our credit memos that we do for every deal, you would be amazed at how much time and effort we spend in looking at all the various risks associated with it. And I think that hopefully provides comfort to the market that we are sort of a second or fourth eyeball on something. And so I think we're, like I said, looking for more volatility, wider credit spread so we can ensure more bonds in the primary and secondary market.
Devin Phillips (
Well, all right, so I'm thinking that you know, guys should come up with some kind of swap idea to take people out of ones and twos and threes, you know what I mean?
Randy Gerardes (
Yeah. Doing anything programmatically is always difficult, but we have obviously done a lot sort of on the lower coupon sort of programmatic approach at least where shops are interested in being sort of pitched by us on those ideas. But we are a absolutely actively marketing our product on those type of structures that are out of favor.
Devin Phillips (
Stranded assets.
Randy Gerardes (
Stranded assets. On the credit side, we don't like stranded assets on the structure side on bonds. We don't mind stranded assets. We don't want some stadium not being utilized that has our wrap on it. No stranded assets or a power plant. We don't want that. But we do help clog the plumbing, unclog the plumbing rather when it relates to those type of structures.
Devin Phillips (
Gotcha. Well folks, we're running out of time. We got about five minutes for Q and A. Any questions? Yes sir.
Audience Member 1 (
I have a question for you regarding you explain your multi-dimensional approach to, investing and my prior life I was at Fidelity and I understand it, we come to market now with our clients and our issues and we look at one thing and it's spread and that's what our underwriters talk to us and everything is judged on the success of deal based on spread. How do you convey what you're going through in the investment process? You're going to into that process so you can help us and help my clients better understand why Nuveen didn't play, why carnival didn't play in a deal or why you did to for help them to better understand that dynamic.
David Blair (
So yeah, I think it all starts with spread. I think that's doing the right thing and then hopefully you're setting that spread where it needs to be relative to what's been coming in the market and being mindful of what's in demand, right? And the size of your deal, liquidity, all those play into spread. So hopefully the spread, ultimately we're going to make a decision about whether we're being compensated. And I think an important point though, there can sometimes be misperceptions. You might get by participation in a particular deal that might not be driven. Your spread might be fine, it's not overly attractive, but it's something that, okay, we have cash, we need to put it to work. But on the previous day, suddenly the market turns. And what can happen as have having worked in the market long enough, you can have some event outside of Munis even that happens, say the Silicon Valley bank thing is an example, a pretty extreme example last month. And then suddenly things change and that's why deals get pulled sometimes and they decide to do it another day or another week. But there are just you, I serve at the vagaries of the market and where we come in one morning, often we'll decide this the previous evening we're talking about deals, what we're going to put in for, and we're say we're going to put in for half the size we typically would on these deals because we want to wait and see what the market tone is in the morning. It was really bad for the last half of the day. So sometimes often that's going on too.
Neil Crabb (
Yeah, it's all relative value for us as well. I mean, we look at supply dynamics in each state and make decisions on where we want to participate in that particular state. And again, we Munis are traded by appointment. We don't know what deal's going to come week to week. We do have a calendar. It's better than the corporate bond calendar, which is daily. But it's hard to judge sometimes. And like David said, it depends on our cash needs from our customers and state specific strategies. So there's a lot of factors that goes into our investment decision on a daily basis. It depends on the structure where we think the money is being put to work, where there's liquidity in the market, whereas the retail investor buying. So yeah, there's a ton of factors, but relative value is one of the largest obviously. So it does depend on if we think the bonds are attractive.
David Blair (
And I think that comment on where the retail investors buying is an important one because for a lot of SMA investors, they're going out to just about 18 to 20 years, as long as they'll go, some will go shorter out to 10 years only. But for a lot of our intermediate strategies that's about where they're going to. And so you see some demand will drop off as you get into 2043, 44, 45 maturities. There's still demand there, but you'll see maybe different participation than five years shorter than that. And then also coupon selection can be critical between fives and fours. You want to be sort of observing where the demand is at any point in time because that it can shift depending on what's going on in the market.
Devin Phillips (
So I think that kind of wraps us up, folks. We're out of time. I want to thank the panel, everybody here for coming and doing this with us. And thank you for attending folks.