PFM transitions to Bloomberg’s AAA yield curve for pricing

PFM Financial Advisors has begun using the Bloomberg BVAL AAA Municipal Curve as its primary market yield curve in a shift from using the Refinitiv MMD AAA curve.

The Philadelphia-based muni financial advisory firm, the largest in the industry, has used BVAL for several years, but once the full interpolated curve and the intraday hourly changes were released on the Municipal Securities Rulemaking Board‘s EMMA, PFM decided to use BVAL as its primary curve going forward, said Todd Fraizer, managing director and head of PFM’s Pricing Group.

He said many attributes of the BVAL curve are appealing, such as transparency, accessibility and timeliness.

“It is a positive for the municipal market that the entire market has public access to a fixed-income benchmark, which we’ve never had,” he said.

BVAL’s AAA Municipal Curves are “constructed over a term structure from three months to 30 years and rely on sophisticated modeling techniques that normalize credit differences of eligible AAA-rated credit ensuring no single trade or contribution has an outsized influence on the curve,” according to a PFM press release.

The BVAL Curve also “uses real-time trades to reflect movement in the municipal market, with AAA curves monitored hourly by a team of municipal evaluators,” the release noted.

BVAL releases its full interpolated curve in hourly updates throughout the day. The dependability and predictability of updates every hour on the hour is useful for the market, Fraizer said.

BVAL also more closely adheres to the International Organization of Securities Commissions’ principles for financial benchmarks, which are in place to remove any potential conflicts of interest, according to Fraizer.

Domenic Vonella, director of U.S. Municipal Bonds at LSEG said, it is TM3/MMD’s “fiduciary duty to provide honest, consistent, unbiased data reflecting daily activity and trading trends of the institutional municipal market.”

TM3/MMD is a leader in U.S. municipal data services and “will continue to be exclusively focused on this mission to assist clients with serving their customers’ best interests and to avoid misinformed decisions,” he said.

“While some may try to imitate our services, they simply cannot be duplicated in part due to our dedicated staff, and their focus on exceptional service for the U.S. municipal bond market,” Vonella said.

The change occurred on Oct. 1. Since the transition, PFM has done 61 negotiated pricings — 33 of which have used only BVAL and 28 of which have used both BVAL and Refinitiv MMD, Fraizer said.

One of the negotiated pricings that used both of the benchmark curves, $116.835 million of GO highway capital improvement bonds from Ohio, was the first time the state used BVAL, having previously used only Refinitiv MMD, said the Ohio’s Treasurer’s Office.

The treasurer’s office said it was attracted to using BVAL because it’s a free benchmark available to the entire bond market.

BVAL has publicly available information about how the benchmark is calculated and shared with the muni market, something that is not available through Refinitiv MMD, the office noted.

“Transparency is important to the treasurer’s office,” the office said. “We want to make sure that we’re doing the best we can do price trades most efficiently using the market data that’s available.”

Therefore, in speaking with PFM, the office decided to use BVAL.

Another of the 61 negotiated pricings, $162.480 million of senior lien Public Project Revolving Fund revenue bonds from the New Mexico Finance Authority, also offered both BVAL and Refinitiv MMD spreads, said Chip Pierce, chief financial strategist for the New Mexico Finance Authority and a former PFM employee.

The New Mexico Finance Authority uses AAA curves in two ways: when the authority is planning to bring a deal to market and when setting interest rates for its borrowers, he said.

Historically, the authority has used the Refinitiv MMD AAA curve but is now looking at BVAL as a possible addition to that process.

Yield curves have historically been beneficial in stable markets, but in times of volatility, they can be a lagging indicator, which can be problematic, Pierce said.

“If the spread is thrown out of whack because of market volatility, that impacts us,” he said. “I’m all in favor of anything that will improve the real-time transparency of municipal yields.”

For the foreseeable future, the authority will use a lot of different information and data on “both where we priced historically on MMD and where we priced historically on BVAL and what other comparables are in the market,” he said.

“So it’s not a hard and fast that we’re only using BVAL,” he said. “It’s going to be the same process as it’s always been, which is let’s get as much information we can both in the secondary and the primary markets and set a scale based on that.”

PFM’s switch is “a signal to the market to try to give issuers more power over their pricing, trying to take control of the market at its benchmark and to try and gather as much information to make the best decision for their taxpayers,” the Ohio Treasurer’s Office said.

However, the transition has caused some “growing pains,” according to one underwriter.

The underwriter had historically used Refinitiv MMD but noted that PFM had been pushing for the BVAL curve, which is a change for the market.

“Competition is always good. It always makes things better. So I’m not opposed to it. It takes a little while to get people on board,” the individual said.

The Refinitiv MMD and BVAL curves are fairly close, but the assumption is the market is using Refinitiv MMD, the individual said. The underwriter said there is transparency with BVAL, and transparency helps liquidity.

“So having more information out there is only going to help investors and increase liquidity for our product,” the underwriter said.

Vonella noted that the suite of 250-plus MMD curves “are an unbiased and trusted source of data used across new-issue pricing/bookrunning, debt structuring, secondary trades, news, risk, evaluated pricing models and more,” he said. “The interdependent historical relationships between the MMD curves, which help users track different structures and understand a broad range of market activity, can also be found on TM3 and our partner applications to solve a wide variety of institutional needs.”

Moving forward, the individual said underwriters may be asked to quote both spreads.

“That’s a bit of a hurdle to get over because if we’re being told to price deals on BVAL, we still got to give the customers the spread to the MMD,” the underwriter said. “It’s just an extra step for us.”

However, “as an underwriter, you have a role to get the best price you can for the issuer, so any way we can do that for them, we’re going do it,” the individual said.

In response to the underwriters’ observations, Fraizer noted there’s always resistance to change at first.

“We certainly recognize that we don’t see this happening overnight, but we hope more and more people will adopt it,” he said. “We wouldn’t do this if we didn’t think it was for the good of the entire municipal market.”