MuniLand

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.

The MSRB’s Long-Range Plan envisions that the CTP would serve as the next-generation of RTRS and would include, in addition to enhanced public access to real-time post-trade pricing information, new centralized public access to pre-trade pricing information, as well as related disclosure information, yield curves and other utilities for public users of the information.

This development is revolutionary for the municipal bond market. It will help non-dealer investors assess the fairness of prices they are being offered on a security. This will be the most significant step for municipal bond trading since the MSRB RTRS trade reporting system was established.

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.

Check me out on Reuters Insider. Insider is a free Thompson Reuters video service for finance professionals covering multiple asset classes.

Muniland is shrinking

Muniland bond issuance is slowing, according to Thomson Reuters data. Year-to-date issuance through June was $176 billion versus $194 billion in the same period a year ago. Thomson Reuters broke down the data by the largest issuing states and region of the country above. The West, likely fueled by California, and the Southwest were the only regions that borrowed more this year than last. It would be interesting to map this against economic growth across the country.

 

This chart shows how municipal bond issuance for new money projects has remained steady at around $70 billion this year to date, while issuance to refund higher coupon bonds has slowed from $125 billion to $106 billion. As interest rates go up, refunding higher coupon bonds with new bonds slows refunding issuance. If interest rates continue to go up, this source of new issuance will likely shrink considerably.

There are many factors that are weighing on issuance, but the primary one is likely to be the high-rate environment. There are other factors like shrinking federal revenues due to sequestration and rising pension and healthcare costs for state and local governments. There has been more active pressure from rating agencies about future liabilities like pensions and a lot of uncertainty about the direction that Congress will take regarding capping the muni bond tax exemption.

Muniland, meet your issuers

 

Bloomberg’s Joe Mysak, whom I consider the king of muniland, had a delightful stream of consciousness via Twitter today about how little information he had to report from when he was a muni reporter in the 1990s. In one tweet he laments the lack of access to preliminary official statements for bond offerings. To get one, “you basically had to rely on spies,” he says.

Thankfully, those days are over. Official statements are in the public domain via a giant file cabinet called EMMA, which is maintained by the Municipal Securities Rulemaking Board. It’s muniland’s equivalent to the SEC’s Edgar system for corporate securities (actually it’s even more advanced).

The deafening roar has subsided

The recent sell-off in fixed income markets, led by the decline in U.S. Treasuries, was big by historical standards. Here the Federal Reserve Bank of New York compares past Treasury bond sell-offs with the most recent one. The recent rout was much deeper and more sustained than most in history.

If we drill down a little deeper into muniland, we see some interesting patterns. Using index data from Standard & Poor’s and Morningstar we can see how July and year-to-date losses compare for various classes and maturities of bonds:

Treasury bonds were hardest hit this year-to-date. Long-dated Treasury bonds had a loss of over 7 percent for the year. Short muni bonds squeaked out a small gain, while long munis suffered. Long corporate bonds fared slightly better.

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