Municipals Stay Strong; Regulation Raise Concern for 2019
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.
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