MuniLand

A deep dive with T. Rowe Price portfolio manager Hugh McGuirk

I had a chat with Hugh D. McGuirk, head of T. Rowe Price’s municipal bond team and a member of their Fixed Income Steering Committee. Mr. McGuirk is also a portfolio manager for the US Municipal Long-Term Bond Strategy at T. Rowe Price. Here is the interview.

Q: Do you do credit analysis in house?

A: Hugh McGuirk: Yes. The T. Rowe Price municipal investment strategy is driven by rigorous, independent fundamental analysis.

Q: Are you finding adequate dealer liquidity when you need to make adjustments to portfolios or cover redemptions?

A: In the wake of the financial crisis and in the face of more stringent regulations, dealers have scaled back their inventories significantly. We believe this trend is one that is likely to persist. While this generally reduces liquidity across the municipal markets and can amplify volatility, particularly during sell offs, we are able to trade efficiently and effectively in the municipal market.

Q: Is shrinking municipal bond issuance a problem for you? Would it be if inflows got stronger?

Could the BRIDGE Act be the solution for infrastructure?

New legislation introduced by ten U.S. senators called the BRIDGE Act acknowledges that the likelihood that Congress will increase the gas tax or other infrastructure grants is “bleak.” BRIDGE would create a new form of government sponsored entity (GSE) called the Infrastructure Financing Authority (IFA).

The proposed legislation, led by Virginia Senator Mark Warner, would create an authority that would operate independently of the federal government to make loans and loan guarantees to projects that have sufficient cash flows to repay the loans.

The key provisions of the BRIDGE Act:

·  The BRIDGE Act includes broad eligibility for funding:

Projects would have to be at least $50 million in size, and be of national or regional significance to qualify. Five percent of the Authority’s overall funding would be dedicated to projects in rural regions, and rural projects would be required to be $10 million in size.

Infrastructure requires funding; Where will it come from?

Twitter was abuzz over a chart that was posted on FT’s Alphaville. Quack, quack, quack went Twitter, we need infrastructure spending to boost the economy! Of course nobody mentioned that Republicans, who recently shut down Congress to prove a point, are loath to increase spending. So where could additional money for infrastructure spending come from?

Here is a quick summary of possibilities.

The U.S. government: The likelihood of increased federal spending on infrastructure is almost zero, unless Congress wants to raise the federal gasoline tax. Congress has not increased the gas tax since 1993, not even to keep up with inflation.

State and local municipal bond issuance: This is where the bulk of current infrastructure spending comes from today. Municipal budgets have been constrained. New municipal bonds issued through the end of October fell 14.9 percent to $262.85 billion, according to Thomson Reuters. It’s not likely that state and local governments have significant balance sheet capacity to issue more debt. Here is the current outstanding municipal debt and how it is distributed (source: Sifma):

Muniland’s Central Transparency Platform: My survey

The MSRB has published a concept release about how it should design the new Central Transparency Platform (CTP). For the first time ever in muniland it will also gather and collect information on bids and offers before bond transactions occur (pre-trade). This information will be made available to the public. Here is how the MSRB describes the project:

With respect to pre-trade price transparency, there is currently no central location in the municipal market through which such pricing information is made broadly available to the public in a comprehensive manner. To the extent that pre-trade pricing information is available, it is typically provided by electronic networks operated by broker’s brokers, alternative trading systems (ATS) and other similar systems,[7] although such information also has sometimes been provided through non-electronic venues as well.

Typically, access to pre-trade pricing information is limited to market participants engaging directly with such venues and may be further limited to information regarding only those potential transactions involving the particular market participant, with information consisting of some or all of the bids and offers entered for a potential transaction.

Infant Moscow muni bond market resembles U.S.

For those of us in muniland used to massively oversubscribed municipal bond offerings, this report from the Moscow Times came as a shock:

In its first municipal bond issue in recent years, Moscow managed to sell only 35 percent of the securities on offer, raising 6.85 billion rubles ($212 million).

The city floated three-year bonds worth 20 billion rubles on Wednesday with a yield of 7.12 percent, said Alexander Kovalenko, deputy head of the city’s finance department.

Puerto Rico’s borrowing goes private

Barron’s ran a cover story last week and more articles followed in the financial press about the economic disabilities of Puerto Rico. These disabilities have been fueling a sell-off of the commonwealth’s public debt. Here is a chart showing the spread (or extra yield) that Puerto Rico bonds have had over the last three months:

You can see that the 20 and 30-year bond spreads have been rising since early June in a consistent pattern. This may be related to mutual funds selling their long Puerto Rico bonds. Thomson Reuters Municipal Market Data senior analyst Daniel Berger describes the situation:

Because Puerto Rico bonds are triple tax they are widely held by some well-known mutual funds. The wider spreads in these names have lowered prices of these muni mutual funds that rely on Puerto Rico bonds for higher income (very important in a low interest rate environment.)

A fund manager looks over muniland

Here is a broad sweeping statement for you: there is a lot of group-thinking in all markets, and when I talk to participants far outside of New York, I tend to find their thinking more individual and reasoned. I recently chatted with Jeffery Elswick of Frost Investment Advisors’ Total Return Bond Fund, who is based in San Antonio, Texas. The fund is generally classified as a core, intermediate investment grade bond fund that buys all kinds of bonds, including taxable munis. Morningstar gives the fund five stars.

Here is some of our chat:

Cate Long: Do loads on retail mutual fund share classes slow down redemptions?

Jeffery Elswick: That is an interesting question and logically it should, but I’m not sure that retail investors take it into account when selling bond funds.

CL: Do the big dealers running thinner trading books have an effect on your redemption strategies?

Alternative trading system BondDesk up for sale

Reuters reported this week that the retail focused corporate and municipal bond trading platform BondDesk is up for sale:

Institutional fixed-income trading platform providers Tradeweb and MarketAxess are among three bidders for BondDesk Group LLC in a deal that is expected to be valued up to $200 million, two sources familiar with the situation told Reuters this week.

Disclosure: Thomson Reuters is the majority owner of Tradeweb.

BondDesk was founded in 1999 by Charles Almond who, with Paine Webber (which became UBS), formed the first bond aggregation platform for odd-lot or retail sized trades.

What happened to Chicago’s bonds?

Last week, on August 23rd, an unlimited tax general obligation bond for Chicago  had a disastrous performance.

The bond (Cusip 167486PS), was issued in 2012 and matures in 2032. The original offering was for $594 million. The piece in discussion was $1.65 million (big bond offerings are usually chopped up into smaller pieces with different characteristics and maturities). The yield on the bond (rated A+ by Standard & Poor’s and AA- by Fitch) was 5.94 percent on August 23, or over 10 percent on a fully taxable equivalent basis. Is Chicago really this risky? What is going on?

I pulled the average yield for comparable New York City bonds. The bonds, which are rated Aa2 by Moody’s and AA by Standard & Poor’s (approximately two notches higher than Chicago’s bonds), were yielding 4.66 percent for 2032 maturities on the same day. This is a 1.28 percent difference (128 basis points in bondtalk). Chicago bonds are selling pretty cheap.

Wobbly muniland markets

Just some chart play today. Notice all the weak spots.

Chart 1 and 2 are from Morgan Stanley’s August Municipal Bond Monthly.

S&P Muni Index data is here.

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