MuniLand

A visit with BlackRock’s muni managers

BlackRock

The New York offices of BlackRock, the giant fund manager, crackle with the energy of money. BlackRock is the largest fund complex in muniland, with over $100 billion in municipal fund assets along with undisclosed amounts of separately-managed accounts that hold municipal bonds.

Peter Hayes leads the BlackRock Municipal Bonds Group. He is also a member of the Americas Fixed Income Executive Team and BlackRock’s Global Operating Committee. Hayes is muniland’s biggest kahuna. When he and his team talk, people listen.

Hayes, BlackRock’s head of municipal credit research Jim Schwartz and head muni strategist Sean Carney hosted reporters for a discussion last week.

Hayes said that muniland was oversold at the end of 2013. Now he is seeing a bigger crossover presence chasing yield. Crossover refers to non-traditional buyers who don’t use the municipal tax exemption.

Tax hikes on high income earners have helped produce steady muni fund inflows since January 15, according to Hayes. BlackRock has also had good growth in separately managed accounts (SMA). Muniland issuance is down 25 percent in 2014. Relative value is lower than the pre-crisis level, and Hayes says we may be in this environment for the duration of 2014. It is the strongest technical environment in some time, says Hayes.

What happens to muniland in 2012?

It looks like smooth sailing for the municipal bond market in 2012, according to three senior market participants who exchanged views at the Fitch Ratings 2012 Municipal Credit Forum. Continued strong demand for municipal bonds, ongoing low bond issuance, favorable Federal Reserve rate policy and major banks upping their direct loans to municipal entities will make 2012 another strong year.

Estimates of how many new municipal bonds will be issued in 2012 ranged from $300 billion to $350 billion. George Friedlander, a municipal strategist at Citigroup, dug a little deeper than the gross numbers and discussed the maturity profile of the municipal debt market. He talked about “bond years outstanding,” which is a new concept to me. Friedlander explained that with the massive amount of bond refundings that are happening in this low-interest-rate environment, the overall maturity of bonds outstanding is contracting. Or, to put it another way, as municipal bond issuers call long maturity bonds, they are replacing them with shorter duration bonds at lower interest rates. This shrinks the amount of bonds available in the 15-30-year range. It could help explain the new lows that the Thomson Reuters MMD AAA scale keeps hitting for longer maturity bonds. Friedlander had estimated that there was $90 billion more in bond refundings in 2011 than new issuance.

Given that refundings took up a big portion of 2011 bond issuance, Friedlander projected that there was $170 billion of “new money” that flowed into muniland last year. Much of the cash invested in the muni space was “old” money that investors had from their refunded bonds. This would help explain the meteoric performance of muniland in 2011, and it’s likely to have big implications for 2012.

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