Mu­nic­i­pals Stay Strong; Reg­u­la­tion Raise Con­cern for 2019

The Bond Buyer - - Market News -

The mu­nic­i­pal mar­ket got stronger once again, beef­ing up with the end of the year right around the cor­ner.

Al­though the mar­ket has a pos­i­tive tone head­ing into the new year, some mar­ket par­tic­i­pants were fo­cus­ing on po­ten­tial pit­falls ahead in 2019.

One Mid-At­lantic trader ex­pressed con­cern over what’s in store from the Se­cu­ri­ties and Ex­change Com­mis­sion, Fi­nan­cial In­dus­try Reg­u­la­tory Au­thor­ity and the Mu­nic­i­pal Se­cu­ri­ties Rule­mak­ing Board.

“I think there will be more reg­u­la­tory em­pha­sis on [ex­change-trade prod­ucts] which is counter-pro­duc­tive to bid-side sup­port,” he said. “Fewer days to set­tle trades, ex­tended [Pre­vail­ing Mar­ket Price] re­port­ing — any­thing that the SEC, FINRA and their step­sis­ter the MSRB can do to drive in­vestors to fee-based ac­counts, which is ex­actly and pre­cisely the wrong type of ac­count for re­tail muni in­vestors.”

He added: “These reg­u­la­tory em­ploy­ees who never wrote a ticket or man­aged a bond ac­count can’t seem to do the math and ra­tio­nal­ize the ex­treme costs to in­vestors over tra­di­tional bro­ker­age, and as a re­sult of their in­abil­ity to see how traders ben­e­fit the mar­ket and main­tain sta­bil­ity, desks have been min­i­mal­ized or closed.”

The trader said to­day’s in­vestors are lucky to get eight bids on a good bond whereas years ago it was com­mon to get a dozen or more.

“In a nut-shell, the muni se­condary mar­ket will lose liq­uid­ity and trans­parency in 2019. Re­tail in­vestors will pay many multiples of a mark-up in an­nual fees while los­ing any hope of ac­tu­ally hav­ing their mu­nis ‘man­aged.’ ETF’s and mu­tual funds will pros­per, mul­ti­ply­ing in­vestor costs and drain­ing the mar­ket of liq­uid­ity even fur­ther.”

Mu­nic­i­pal bonds were stronger on Fri­day, ac­cord­ing to a late read of the MBIS bench­mark scale. Bench­mark muni yields fell no more than one ba­sis point in the three- to 30-year ma­tu­ri­ties.

The two re­main­ing ma­tu­ri­ties were higher by less than one ba­sis point.

High-grade mu­nis were also stronger, with yields cal­cu­lated on MBIS’ AAA scale fall­ing by as much as one ba­sis point in the two- to 30-year ma­tu­ri­ties. The lone re­main­ing ma­tu­rity saw its yield rise by no more than one ba­sis point.

Mu­nic­i­pals were steady on Mu­nic­i­pal Mar­ket Data’s AAA bench­mark scale, which showed the yield on both the 10-year muni gen­eral obli­ga­tion and the 30-year muni ma­tu­rity un­changed.

On Fri­day, the 10-year muni-to-Trea­sury ra­tio was cal­cu­lated at 87.5% while the 30year muni-to-Trea­sury ra­tio stood at 110.4%, ac­cord­ing to MMD.

IN­FLOWS

In­vestors in mu­nic­i­pal bond funds put cash in for the sec­ond straight week, af­ter 13 straight weeks of out­flows, ac­cord­ing to Lip­per data re­leased on Thurs­day.

The weekly re­porters saw $931.424 mil­lion of in­flows in the week ended Dec. 26 af­ter in­flows of $255.031 mil­lion in the pre­vi­ous week.

Ex­change traded funds re­ported in­flows of $549.913 mil­lion, af­ter in­flows of $525.959 mil­lion in the pre­vi­ous week. Ex-ETFs, muni funds saw in­flows of $381.511 mil­lion af­ter out­flows of $270.928 mil­lion in the pre­vi­ous week.

The four-week mov­ing av­er­age moved to the green at $44.474 mil­lion, af­ter be­ing in the red at neg­a­tive $283.038 mil­lion in the pre­vi­ous week. A mov­ing av­er­age is an an­a­lyt­i­cal tool used to smooth out price changes by fil­ter­ing out fluc­tu­a­tions.

Long-term muni bond funds had in­flows of $694.069 mil­lion in the lat­est week af­ter in­flows of $376.356 mil­lion in the pre­vi­ous week. In­ter­me­di­ate-term funds had out­flows of $255.794 mil­lion af­ter out­flows of $448.643 mil­lion in the prior week.

Na­tional funds had in­flows of $936.236 mil­lion af­ter in­flows of $386.916 mil­lion in the pre­vi­ous week.

High-yield muni funds re­ported in­flows of $395.844 mil­lion in the lat­est week, af­ter out­flows of $3.931 mil­lion the pre­vi­ous week. ◽

By AAron Weitz­mAn

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