Higher rates, negative returns, massive outflows hang heavy over the industry

Higher interest rates, macroeconomic uncertainties and outflows from mutual funds resulted in a rather gloomy outlook from panelists assessing the state of the union for the muni bond market at The Bond Buyer’s California Public Finance conference in San Francisco.

Broker-dealers are experiencing a myriad of pressures. Individual bankers are putting in longer hours for the same amount of money to attract investors amid outflows. Plus, bringing on young talent has been challenging amid the dearth of new-issuance. 

“All banks are under pressure,” said Rob Dailey, head of public finance for PNC Financial Services.

Every bank has significant mark-to-market losses, significant exposure to commercial real estate losses, an increased regulatory burden, and a greater need to invest in technology; and banks are likely facing these pressures for another 12 to 18 months, Dailey said.

Despite the challenges, Siebert Williams Shank & Co. will not be exiting the muni industry joked Gary Hall, Siebert’s partner, president, head of infrastructure and public finance, alluding to UBS’s recent exit from the negotiated market.

Even with headwinds and concerns about higher construction costs, Hall said he is still bullish on the muni market and believes it will be strong for years to come because the country has such great infrastructure needs.

“For fixed income investors, there are not a lot of places to hide,” said Jason Giordano, director of fixed income at S&P Dow Jones Indices, who noted Treasury notes are in their third year of negative performance, a situation that hadn’t occurred in the past 90 years.

There has been an exodus from long-term maturities in mutual funds and shorter-duration investments, and massive inflows into money market funds, he said.

Muni prices are down about 20% across the board, Giordano said. That means yields are up. S&P’s airport yield index was at 1% a year ago, and now it’s about 5%, he said.

Ronda Chu, San Francisco International Airport’s capital finance director, said the airport’s long-range capital improvement program means it can’t wait for the markets to be favorable to sell debt because projects need to move forward.

For instance, when SFO went to market earlier this year they had $400 million in subscriptions on a $241 million lease revenue deal, Chu said. “The front end was fine, but the 5- to 10-year range was challenged, and we had to pull some maturities that didn’t receive any interest,” she said.

“We have gone to market in good markets and bad markets,” Chu said. “As an issuer, we have to remain flexible, and we would ask investors to look at who is coming to market.”

She added SFO recently issued a preliminary offering statement for a deal coming in November.

Though the airport, like many issuers, can’t stay out of the market when the times are uncertain, it does have a $6 million commercial paper program that helps tide it over, until it decides what is the best time to sell a deal, Chu said.

“We know when to peel off certain parts of the transaction. But we have to make sure the airport has the funds to make those improvements, hopefully you folks noticed when you flew into the airport,” said Chu, referencing a video that played at the onset of her remarks highlighting airport improvements.