Sorry that it has been almost 2 weeks since my last blog (sounds like my confession). A lot has gone on but little has changed. The muni market rally put 10 days in a row together since 1/19 but it seems as though the party may be over for now. Govies have lost ground for the last three days as the worries of Egypt have faded and the economic news has been mildly positive. But munis continued to rally to lower yields, especially on the long end, and this is the problem. Ratios have changed dramatically on the long end of the curve coming down from 110% of treasuries to just 103% in 5 trading days. This does not warm the hearts of the buyers who got back in the market in the last 2 weeks. All the fun has been squeezed out. To counter this, retail, both professional and mom & pop, have been snapping up AAA and strong AA credits throughout the 1-20 maturity range. The buyers are not concerned about the tax consequences as they buy out of state credits with abandon to diversify out of their states. The need for high grade credits underlies the fears of possible problems with issuers of lesser stature. This has created a market that is currently divided into 2 categories: very high grade and those who are not. Guess who wins?? Strong credits and this will not change soon.
Now to the mini series on CNBC. Last week CNBC had all the pundits on the show to counter Ms Whitney ( married to a WWF fighter) in order to prolong it's diatribe against the municipal issuers. But all of them poo-pooed her bet about the death of munis. Finally another crisis arose... Egypt... and munis went back to the corner where they have been hiding for so long. Thank goodness. But this has not stopped the print media from continuing the discussion of the demise of the muni market. The stories flow like wine and the reporting should make the Columbia Journalism School wince at what is being written. In the weekend WSJ there was an article titled "States Plead To Small Investors 'Buy Bonds'". Well I started to think about this article and decided to rebut the poor research in it. Here goes:
I missed this article yesterday that came from the WSJ's Saturday edition. Let's get some things straight. Issuers have been reaching out to retail for over 20 years with retail order periods. The ROP was invented by ML in the late 80's to assist NYC in reaching the masses in distributing bonds. After about 7 years of no access to the market due to it's near bankruptcy in the mid 70's, NYC had huge infrastructure projects (think decaying bridges, subways, roads, schools, etc.) that needed to be funded by bonds ( I moved there in 1975 .. I know). With rates in double digits, the City needed to get the lowest cost of capital it could. Retail was always known to pay more for bonds than institutions as the retail investor is looking for specific bogies in returns. But they never had a chance to buy a new issue as they do today. Most retail bought secondary market bonds. Also at this time the market functioned quite differently than it does today. Issuance was considerably lower than today.. think $100b vs. $400 bil and no negotiated deal ever got done with a total net designated book buying all the bonds. Dealers routinely stocked bonds in anticipation of future sales. The book of orders back then looked more like 50/50 institutional and stock orders. The ROP gave bond houses a chance to get retail orders first before placing orders-- think riskless trades-- and with the bifurcation of maturities they could better suit the retail buyers appetite by offering them more retail friendly coupons for bonds. The outcome of this was a larger pool of investors was reached which would help in lowering costs by gaining a wider distribution. Institutional investors liked the idea as they could see which deals were garnering strong retail interest and therefore give them insight to another market they would need when they turned over their portfolios. Both types of investors benefited. As the ROP took hold issuers across the country, big and small, embraced this idea.This is not a new idea as intimated by the article.. as a matter of fact it has been going on longer than the analyst in the article has been an analyst!! And the selling group idea, even in Connecticut, is far from a new idea..So much for investigative journalism....They routinely placed radio and newspaper advertisements in the week preceding the sale to garner more awareness of the upcoming issue, no longer relying on the broker to call Mrs.. Jones about an upcoming issue. Spring forward with technology, websites are the new medium for issuers to use to reach out to investors. With the call for more transparency, issuers are able to put more information on their websites about upcoming sales, events and the POS. California was the first to embrace this idea followed by NYC,NYS,Mass, Oregon and other large issuers throughout the country. Retail has mostly stayed close to home when buying bonds as they can see and touch their investments.
But this does not change the landscape going forward. Worries persist amongst buyers over the strength of the credits they buy. With the demise of insurance, TOBs, hedge funds and other leveraged buyers, the halcyon days of munis have passed for now and a new reality... I hate the term "new normal"... has emerged. Less liquidity is the new mantra and with that spreads have widened and obtaining credit in the marketplace is much more difficult to achieve at a low cost.
Oh yeah... inflation is in the headlines: apparently the Girl Scouts are charging the same for cookies but the boxes contain less of them....I guess they took a page from the playbook of the cereal industry!!
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