Bonds

What fewer institutional buyers mean in a retail-centric market

Mikhail Foux, Managing Director and Head Municipal Research & Strategy at Barclays, discusses the increasing retail concentration of muni ownership as fewer institutional investors are engaging in the asset class due to various regulatory and tax-policy related issues and what it means for munis during times of volatility. Bond Buyer Executive Editor Lynne Funk hosts.

Transcription:

Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Michael Scarchilli (00:04):
Hi everyone and welcome to the Bond Buyer podcast, your go-to source for everything related to municipal finance. I’m Mike Scarchilli, editor-in-chief of the Bond Buyer, and this week we’re talking liquidity demand and the evolving dynamics within the muni bond market. Joining us this week is Mikhail Foux, managing director and head of municipal research and Strategy at Barclays Investment Bank, where he spent almost a decade. This followed a nearly decade long run at Citigroup as director of credit derivatives and muni strategy after several years working as the vice president at Credit Suisse. Before we get into the conversation, however, let’s first bring in bomb buyer executive editor Win Funk who conducted the interview to add some insight and context to what you’re about to hear. Lynne, thanks for joining us.

Lynne Funk (00:48):
Thanks, Mike. Great to be here.

Michael Scarchilli (00:50):
So a couple of questions as we get into the interview. We’ll start with the liquidity. The issue of liquidity in the muni market was a key topic of your discussion. Can you give us some insights that Mikhail shared about the factors that are contributing to the current liquidity environment and implications that these have for investors?

Lynne Funk (01:08):
Sure. I think the big takeaway is that there really has been a shift in the buyer base of the muni market, particularly since the 2017 tax reform. Even further back post great financial crisis. You’re looking at property and casualty insurance companies, life insurers, they own far fewer munis because of the lower corporate tax rate and banks, banks are holding less due to regulatory changes, foreigners are holding less. And I think what Mikhail had to say is when there are fewer buyers and those buyers are more concentrated in one area, and in this case in our market it’s retail, when in times of volatility hit the market, there’s this herd mentality out of it and not enough alternative investors to step in and prop the market up. So really it’s a story that has been present for a long time in Muni, but being especially exacerbated by some of the shifts over the past few years.

Michael Scarchilli (02:03):
There’s been a lot of discussion also in the market recently regarding Build America bonds and there redemption provisions. I know this is something that you discussed with Mikhail in your conversation. So what can listeners expect to learn about the future of Babs and Bab redemptions and also the potential legal and market ramifications of them?

Lynne Funk (02:19):
Well, I’ll tell you, Mikhail was funny. He said he’s not a lawyer, he doesn’t have a jd. It’s on his list of to dos. But Barclays was one of the first to quantify sort of the outstanding universe of potential Babs to be refunded using the ERP. And Barclay’s put it around 20 to 30 billion. Since the potential legal pursuit by investors came out, he kind of tempered expectations that certain issuers might hold back from refunding out of a fear of lawsuits. But one thing he did note, and this was as of the recording of course, is that as of yet, there really hadn’t seemed to be any spread widening on the issuer credits that refunded their Babs like University of Regents Washington State. And in fact there are still more deals popping up on the forward calendar. But he did say as long as there were no real lawsuits, that there’s still a universe of issuers. If the economics make sense, right, they’ll refund.

Michael Scarchilli (03:15):
All right. And you also get into some discussion with Mikhail on the future of taxable municipal bonds. So what are some of the factors that he believes will influence this segment of the market moving forward?

Lynne Funk (03:26):
Sure. It really comes down to economics market conditions. He thinks the taxable tender universe the smaller than the past two years, there won’t be as many contenders for that taxable advance or fundings probably would only really be used if treasuries and overall interest rates fall significantly enough. So I think the real theme of the story there is if you are a taxable investor, you will definitely need to look hard for opportunities and it’s not going to be that easy and clearly the size of the market is not going to grow as a share of the total or a share of the tax market in general.

Michael Scarchilli (04:00):
Alright, great. That’s some great insight. Thank you n And with that, let’s get into the interview.

Lynne Funk (04:06):
Hello everyone and welcome to another Bond Buyer podcast. I’m Lynne Funk, executive editor at the Bond Buyer. Today I’m delighted to welcome Mikhail Foux, head of municipal bond strategy at Barclays Capital. Welcome, Mikhail.

Mikhail Foux (04:19):
Thank you for having me.

Lynne Funk (04:20):
Great to have you. So there is plenty to dig into today, particularly I want to talk about shifting demand components in this market, build America Bonds credit, the elections. But I’d like to start off with demand. You recently put out a report just this week on the ever-changing demand from Munis, and I found much of it really helpful in looking at the shifts that have occurred over the past few years, but also sort of a longer view, particularly on how institutional investor demands have changed since the global financial crisis. You note in this that retail obviously is always the largest holder of munis, but it’s grown more so as institutional investors from PNC insurers, life insurers, banks, foreigners have paired back due to the various regulatory and tax policy changes over the years. So I’m going to hand it to you now because you’re the expert here. Can you tell our listeners why various players are playing less than Munis, maybe perhaps start with the insurers.

Mikhail Foux (05:20):
Thank you. Yeah, that’s actually was quite a bit of a change over the last several years and probably even more so in the last several years. But it all really started in 2017 when there was a tax reform. And just to recall that prior to that the top tax bracket for corporations was 35% that dropped to 21% and maybe life insurers were less sensitive to taxes. They kind of always played more in the taxable market, but PNC and banks were very sensitive to that. And what happened after that, they pretty much started trimming their exposure, not necessarily right away, but let it buy less and let their old position rolled off. And we kind of start with PNC insurers because that was actually when I was doing this piece and which was really interesting to me when I looked at the level of how much mini holdings PC insurers actually had.

(06:22)

So we had to go all the way to 2003 to see that amount of means that they had. Wow. So really they really, really, really at the lows and effectively if you see what they’re buying and rightfully so, they actually were buying mostly treasuries and liquid. And effectively at this current ratios, because we recall it, p and C typically plays in the shorter end of the curve when you have ratios in the fifties and sixties, like early low sixties. So effectively they don’t see value in tax exams. They stop pretty much stop buying for a period of time. I guess they were buying taxables, but that’s sort of a separate story and will I address in a little bit? So yeah, so they stopped buying and their muni exposure dropped quite a bit.

Lynne Funk (07:13):
Now that obviously would change, right? If the corporate tax rate rose, would it? I shouldn’t say obviously.

Mikhail Foux (07:19):
Yes, I think it will, but the only reason that we see changing as President Biden pretty much stated in his budget and state of the union address. So his plan is to increase corporate Texas and Texas in general, which clearly would be great for our asset class, but to do that he’ll need the help of Congress that shoot two chambers. And we kind of jump into elections here, but if you kind of see the map, I think the how is pretty much in play in our view. But in terms of the Senate, it’ll be very hard for Democrats to keep it keep in mind amongst other things that sort of their map is unfavorable. Don’t forget that Senator Manchin actually, he’s retiring and he is a blue senator in a green, probably deep red state, not green deep red state. So I think they’re pretty much starting already at minus one more likely than not on that front.

(08:23)

So it’ll be very hard for Democrats to keep the Senate and by the way, jumping ahead to election. So our outlook from our policy analysts, they actually see that the house flipping back to Democrats so effectively have split government and then really for the most part it really doesn’t matter that much who the president is. Of course it matters for various other reasons, but in terms of implementing this major policy and shifts in policy, that’s going to happen. So effectively we’re going to have gridlock moving on to probably we’ll talk about other initiative tax initiatives that will roll off the remnants of the 2017 tax bill, but corporate tax will not and it’ll stay at 21% and if it’ll go to 28% as President Biden wants, clearly it’ll bring back at least PNC insurers and I think banks probably will join as well. Keep in mind that banks are not only struggling with lower tax rates, but they also struggling with deposit outflows. And effectively if you see what banks are doing right now, in addition to that, the CRE exposures that they have, especially regional banks, but what banks are doing right now, their mortgage exposure is really increasing. So they just prefer in this environment it makes a lot of sense to actually land and invest less insecurities. So I’m not sure how much you’ll bring back banks, probably you will to a degree, but you’ll definitely bring p and c.

Lynne Funk (09:56):
Do you think though, when you bring up banks, do you think, what other elements is the bank holdings, is that also the regulatory environment? Could that change? Is that the reason? Is that another reason that bank holdings have fallen so dramatically as well?

Mikhail Foux (10:13):
Yes, and then effectively regulators are getting stricter with banks and it’s on the back of the first, it was the great financial crisis of 2008 nine, and then of course we had a mini banking crisis of last year. And effectively what regulators want, they want banks to have a lot more liquidity and then it’ll put all kinds of additional pressure on them to hold more bonds and more liquid buckets. And if you remember, not jumping, moving away from specific muni holdings, but talking about liquidity buckets, the buckets based on liquidity, munis are in the two B bucket, which actually not that great for banks to actually hold, so it costly for them. So amongst other things, and they’re all other various other regulatory initiatives that underway and regulators are only getting stricter. They’re not getting more LA with banks. So I just don’t think it’s going to be anything on that front that will actually help banks to provide the more liquidity and leeway to invest in muni. So it’ll be hard for banks, but clearly it’ll be easier if tax rates will increase.

Lynne Funk (11:30):
Right. So we’re going to stick with demand here. What of mutual funds 2022, obviously the massive, massive outflows 23 still outflows not as severe, and I think it might’ve been you actually who wrote it, but a lot of times it seemed that after a year of massive outflows there’d be some inflows. 23 didn’t do that. Now we’re opening 24 with some inflows. But what are your thoughts on where the mutual fund complex is standing in this market?

Mikhail Foux (12:02):
And the way I kind of group them together, as you probably know, is I have institutional investors and I consider mutual fund retail. So I think it’ll be a relatively big year for mutual funds. But really for them, for mutual funds to actually get more inflows, they will need to see steepening of the yield curve, which is not happening at this point as of yet because we need the Fed to actually start cutting did not happen as of yet. And I think investors in general should get a little bit less incentivized to invest in equities and more incentivized to invest in fixed income, which if you kind of think about it and sort of it’s a proposition for both mutual fund investors as direct retail and various other investors. When you look at current yields and you look at tax rates, right? Then if you kind of think about the direction on tax rates, tax rates are not going down at best they’re staying the same or they will increasing.

(13:00)

So the benefit of actually tax equivalent income for muni will only increase going forward. So I think that going forward, municipal investors will continue putting money into munis. They’re just waiting and they’re a little bit cautious. They were hit by volatility and rate volatility in the last several years. Clearly they’re cautious. And even right now kind of see everybody was so sure that rates are going down this year, actually, by the way, this will not bark this call. We actually expected rates to stay at elevated levels and maybe even increase. But going to the year, everybody thought, okay, it’s going to be like a gangbuster year for all fixed income products, including munis because rates will drop, did not happen. And if anything, rates are actually creeping higher right now. So as an investor, fixed income investor, you have to be cautious here and they are, but I think outflows in my view already stopped. So just a question of when we actually start seeing this inflows, and I don’t think it’ll happen until the second half of this year or maybe even in 2025 when we see more inflows into munis, but I think mutual funds are in a much better position than before.

Lynne Funk (14:17):
What about high yield funds? At this point? They’re seeing what now? I believe it’s 11 consecutive weeks of pretty decent envelopes. Where do you see high yield sitting in this market?

Mikhail Foux (14:28):
So high yield, the problem with high yield, I think in general, if you see who invests in high yield banks do not invest in high yield insurers do not invest in high yield, it’s just funds, even direct retail. I mean maybe here and there, but for the most part they do not really, the retail investor do not invest in high yield. So it’s just mutual funds. So you have just one effectively group of investors, maybe some high yield, high yield hedge funds, but for the most part, as I said, it’s just mutual funds. So I think the supply demand dynamic was relatively good this year. I think if I remember correctly, we had about 3 billion of supply and about 3 billion of inflows, maybe slightly less. So that all evens out. So that’s all great. So that’s why if you look at high grade ratios where they’re right now and high grade spreads, especially like the AA and even single A bucket recently started performing.

(15:25)

When you look at where really you see this value, you have to trade down on credit quality, especially that pretty much everybody including us believe that we’re not going to have a recession, we’re going to have a soft lending of some sort, either SOFTISH or actually soft lending. But bottom line, it’s going to be relatively benign for municipal credit. So I think you’re supposed to invest in high yield and I think at the end of the day that’s where there’s a lot of focus and you probably see quite a bit more trading happening just because that’s where some investors see value.

Lynne Funk (15:58):
Okay. So sticking with retail components here, what about SMA growth? Some folks on the street have it pegged it over a trillion of munis. Is that something that is here to stay and how does that affect liquidity in this market?

Mikhail Foux (16:14):
Yeah, I never was able to estimate it myself. I only see what other people estimate. And I think this estimates range from seven or 800 billion to more than 1 trillion, as you said. So I mean I wouldn’t opine on that, but I think at this point SMEs will only continue to grow. The only thing when people ask this question, they typically mean, so money will flow out of mutual funds or direct retail into SMEs. That’s not necessarily how I see it, although some money flowing from both of these retail investor groups. But I actually see that at some point direct retail, actual retail investors in general that are sitting right now like some estimate like trillions of additional cash, our rate strategists estimate that maybe they have less, maybe like 500 billion give or take, ready to get deployed. And mostly at this point in fixed income.

(17:15)

And when investors get a little bit more comfortable, as I said, with the shape of the yield curve and the direction where things are going. So I think at that point, municipal market for first of all municipal groups will benefit and SMAs will benefit as much as mutual funds, as much as sort of direct retail to a lesser degree of course. But I think you’ll see this massive relocation out of this money market and checking accounts. And more importantly, not even that, if you ask pretty much you can ask a cab driver on the street, what’s the best investment right now? He’ll tell you it’s like six months treasuries or notes. So meaning that when we have this steepen of the yield curve, when the front end will not be as attractive, yielding you more than 5%. So at some point people will realize, okay, so I need to take my money out and they start investing in munis because it’s great tax equivalent income and SMAs will benefit as much as mutual fund as much as ETFs for example. We didn’t talk about that group as well. So I think that’s how I see it. But going forward, I think SMAs give or take that close to 1 trillion, maybe more, maybe less. It’s hard to estimate, but I think this group will only become bigger over time and I really don’t see this train stopping and turning. I don’t see anything on the horizon that should change that.

Lynne Funk (18:42):
You note in the report, the dealer involvement dealer carry in this market has fallen significantly since the global financial crisis. You quoted that from about a decade ago they were carrying 11 billion and much larger prior to that of course, but to now just about 6 billion in the past several years. How does that affect the liquidity in the muni market?

Mikhail Foux (19:05):
It’s clearly a negative, and I think on the one hand you have that, on the other hand you have this sort of growth of ETFs and other sort of loan only investors, and I would say not just loan only, but investors that are less price sensitive. So when ETFs are dealing with outflows or even inflows and they need to put money to work, they actually need to put money to work and they’re much less sensitive about where prices are compared with let’s say mutual funds. So I think to me, you have this ability of the dealer community to intermediate, it actually declined at a time. Like say if we’re talking about during the financial crisis, even before that of course, but even during the financial crisis at a time like market volatility, the dealer community, let’s say remember Meredith Whitney, during that period of time, the dealer community was able to intermediate effectively to backstop this big market sell off.

(20:06)

At this point, there’s no risk appetite for that. So some dealers are more risk averse, some dealers are less risk averse. But as I’m saying, numbers are the numbers. You went from 11 billion and we’re talking about just like five, six years ago to six. And that number I think I don’t have the number to prove it, but I think that number will well over 20 prior to that. So I think dealers cannot backstop market volatility and effectively you see more volatility as a result. So market will become much more technical and it’ll make it more difficult for various groups of investors.

Lynne Funk (20:48):
Right. Do you think with Citi’s exit from the market, the secondary liquidity, is that going to be more challenging? Do you think there are folks pulling in to fill the void there?

Mikhail Foux (21:00):
To a degree, and again, I don’t want to talk specifically talk about Citigroup, but I say that yes, clearly some other investors fill in the void. You have some more regional dealer involvement, but it’s hard because you are having fewer big players. And I’m going back to what you asked me before we had the dealer balance sheet. The dealer balance sheet moved from 11 to six over the period of just several years realistically. So dealers are much less averse, much less, a much more risk averse right now than they used to be before.

Lynne Funk (21:42):
I’m going to give a quote here that from your report, and I’m going to ask you, how does this all in your words, the combination of institutional investors stepping away, dealers becoming less aggressive in providing liquidity and retail becoming the main driver, is making secondary trading much more technical and volatile and the market depth more shallow? How do you see that continuing to play out? You kind of just said that all,

Mikhail Foux (22:07):
I just don’t see changing anytime soon. So again, we didn’t talk about ETFs and I think we talked about SMA and that group will continue to grow, but specifically, we kind of recently put a report on ETFs if you compare the share of ETFs versus the total mutual fund complex. So right now it’s about 12 13%. So if you see what’s happening in the corporate space, we’re kind of lagging by several years. So that number is in the twenties, so we could easily, that share could only increase going forward. The ETF share, the ETF share and what we actually see, what we saw this year, we actually saw small outflows out of ETFs and flows into mutual funds. It’s not going to last HTS will, maybe it’s for a period of time people sort of reversing that there was this trade lost harvest in trade that people did in 2022, did the opposite way when the effectively took money out of their direct holdings and open and mutual funds and put money into ETFs.

(23:19)

And then that’s where the money was sort of sticky for a period of time. And some people say this trade is reversing, but it’s only a small portion of it is reversing. The same thing happened early portion of last year, and the same happened this year. But at the end of the day, the share of the ETF share will only grow and as I said, when they become even bigger and they have more inflows at times and more outflow just because of their sheer size. So it’s just becoming very tricky, especially if you don’t have anybody to backstop that. So the environment, this technical environment that I discussed in this report will only become sort of more pronounced going forward. I really don’t see changing anytime soon really.

Lynne Funk (24:07):
I’d like to move on to build America bonds. You were early in when we got the word, when the market sort of heard that issuers were going to start using the extraordinary redemption provisions, it definitely remains the topic du jour. Of course now the latest development appears that investors are, excuse me, lawyering up and pushing back on issuers plans to refund their Babs using the ERP. And then just today actually as we’re recording this, on March 25th, the University of Cal regions pushed back again and said, we’re closing our deal. We don’t think it’ll affect us. So what does this mean for potential deals? What’s your take on this? What’s it mean for Babs that have already been refunded?

Mikhail Foux (24:53):
So I think it’s very tricky. First of all, I have to say that I was always doing taxable bond is because I came, my original background, I came from the high grade corporate world, so always had soft spot for taxables. So when the sequestration happened in 2013, so clearly we were following pretty much for the last decade. And just in terms of actual numbers, it just clearly when sequestration happened, a lot of people thought, okay, so now we’re going to have a lot of calls. There were par calls at the time, not necessarily spread calls because spreads were much wider than T plus a hundred, but only a handful of deals over the period of 10 years actually called their bonds. And nobody really paid any attention. Well, under let’s say I would say maybe six, 7 billion, the total was over the course of a decade

Lynne Funk (25:49):
And think 180 billion was issued. So exactly,

Mikhail Foux (25:51):
Peanut. Exactly. And just this year in terms of just announcement, I mean not all deals have been actually closed yet, but just announcement we’ll be over 10 billion. So meaning that just over the course of three months, so meaning that things have changed and the three things have changed. Clearly it was a legal opinion that was voiced recently by one of the law firms. Then ratios are relatively attractive at this point for issuers. They’re very low. Some people can say, okay, they were low in 2021, but another thing that had changed actually rates actually much higher. So in terms of discounting is present value makes more sense. So I think at this point it’s probably very, very attractive environment for issuers to do it. The big question when you look at very closely at this ERP language, because at the time it was 2008, 2009, I don’t think law firms, law firms, actually 2009 and 10, not 8, 9, 9 and 10, yeah, people, law firms did not spend much time so hashing out their ERP language when the world was falling apart.

(27:04)

So that was the last thing on their minds. So anyway, so at the time there were all kinds of ERP languages out there and some of them, in my opinion, I’m not sort of, I don’t have a G degree, but sometimes I wonder if I should have gotten one, but especially in this environment, but to me exactly, exactly. More Babs I guess. There you go. Yeah, exactly. I could get one. So some to me, my uneducated view, clearly some of this ERPs were triggered. I don’t even think there’s any even question about that, but some of them sort of in the most generic form, it’s very hard to say if they were or not. And that’s why we have lawyers to sort that out. But I don’t think it’s black and white. And the interesting thing about what happened, as you said, issuers are pushing back, and not only that, after the sum of the investor community decided to threat, no legal actions to my knowledge have been actually implemented at this point, but at least they’re threatening that that could actually happen. So nevertheless, you see more issues like calling their Babs. So initially we estimated maybe we’re going to have 30 billion give or take of Babs refunded on the back of it.

(28:34)

I thought that this sort of latter will put a pause on issuer desire to actually do something on that front, but let’s see how it’s going to play out. It doesn’t seem that issuers at this point, at least they’re as afraid. So we need to see if there’s further the legal actions abandoning how that’s going to play out. But that’s a very, very interesting story and how I was speaking with some investors and we were just laughing saying, going to 2024, who have thought that it will be the bad year that will be munis is the only people story that people are talking about. Who would’ve thought that in 2023,

Lynne Funk (29:16):
2024 even? Yeah,

Mikhail Foux (29:18):
Yeah, exactly. No meaning 2023 when we were in 2023, who would’ve thought that 2024 will be like a bad story?

Lynne Funk (29:27):
It’s so true. We definitely didn’t anticipate it,

Mikhail Foux (29:30):
But nobody did.

Lynne Funk (29:33):
Well, it’s two questions. Have you seen any widening in the tax exempts that have already, have you spread out at all or

Mikhail Foux (29:40):
No, I didn’t see, I don’t want to talk about any specific deals, but I didn’t see any widening. So that’s something in that I should be cautious with clearly given, assuming that there’s some legal challenges. If there’s nothing, then I guess there’s nothing to worry about. But if there’s some legal challenges, one thing I brought up, so way back then for people who could remember during I think 2018, some investors actually challenged the validity of Illinois bonds, and I remember very well there was a pretty widespread differential between those bonds that were challenged and bonds that were not challenged. So I guess the question is where are we at in this process right now? So as I said, no legal actions have been filed as of yet, but if actually we see some legal actions as an investor, you probably would consider that there could be some spread differential between sort of challenge bonds and non challenge bonds.

Lynne Funk (30:45):
What does it do for the taxable market? Taxable munis, they’re already dearth of supply there.

Mikhail Foux (30:52):
Yeah, and that’s why when we talked about supply jumping back, I wanted to say we didn’t talk about life insurers. So life insurers are big investors in taxable munis, and they were big and fact, they had no exposure prior to the financial crisis. They were big buyers of Babs. That’s why when you CP investors that actually upset about the CRP calls a lot of these investors and insurers because they’re big holders of Babs because that’s when they actually started buying taxable munis and then they were big buyers of taxable munis in 2019 through 2021 when we had this massive taxable advisory funding wave of tax. But now it doesn’t make sense anymore. This wave sort of disappeared. We have 30 billion, that’s what our outlook going forward, we’re going to have, again, back to pre-tax advance refund. In years we had 30 40 billion per year issued on pretty much since 2010, I think pretty much every year.

(31:54)

That was the number. I think we’re going back to that number roughly, give or take. So yeah, so we basically have very little taxable issuance. And that’s one of the reasons foreign investors, they also like buying Taxables and suddenly they’re not. So that’s another group of investors. They don’t have as much to buy right now. But also do not forget that this focus is mainly on Babs and Babs. Right now we estimate in general it’s about say 15% of the total taxable markets. So the recall that after 2010, it was about 200 billion issued at the time, but it was 10 years. Some of this Babs matured, then there was a lot of taxable issuance, a lot of corporate cusip, issu, so all kinds of bonds. But the market Babs are a very small portion. So we are not worried that will really sort of this if Babs stop all of those Babs even called out.

(33:00)

So it’s not going to affect market that much. Plus as we said, I mean we don’t think it makes sense for all the issuers, so it’s going to be only maybe 30% or 40% of them will try to exercise even in the worst case scenario. But the flip side of that will also have tenders of taxable bonds. So that’s another thing that will make this market smaller. So I think we sort of a top tick at about, give or take 750, 800 million. So until we see some new driver of some sort, we think that that’s probably was our top topic number. And then the size of the market will only, I would say, decrease or stay the same going forward. So yes, I mean in terms of for anybody who wants to invest in taxable munis, you definitely need to look hard for opportunities and it’s not going to be that easy and clearly the size of the market is not going to grow as a share of total or as a share of the taxable market in general.

Lynne Funk (34:04):
So we already touched on the elections. I don’t know if there’s much to add there, but unless you think so.

Mikhail Foux (34:10):
Yes, I think what we didn’t talk about, so we talked about corporate taxes, right? But there were other things that’s very important that recall that anything that will happen on the residential side, residential on the individual side, that will actually expire in 2025. Okay?

Lynne Funk (34:31):
Right,

Mikhail Foux (34:32):
Right. So we have three major provisions. I mean one of them is sort of clearly beneficial to me is the top tax bracket will increase by more than 2%. So that’s a positive. But then two other things that actually will change and will affect our market. Number one, you have the A MT tax that will reverse to the previous regime and we kind of have these ballpark numbers. So right now you have about 200,000 filers. So if there’s no fix, and we’ll go back to the previous regime, we’re going to have 7 million. So basically everybody under the sun, we will be paying a MT. And that’s one of the reasons a MT bonds are trading cheaper versus non A MT bonds. There’s some other reasons, but this is one of the main reasons for that, right? And number two, that we have sold deductions, especially for everybody in this area.

(35:24)

Everybody in New York, we don’t sold that much. But the flip side of that, that sold really benefited high tech states benefited their revenue collection. So when that disappears, if we go back to sort of the previous regime, unless there is a fix of sorts. So you suddenly see all this high-tech states, mostly blue states will actually, their revenues will not be as great in 2026 and on unless, as I said, unless you have this current regime in place. But the flip side for all residents, it actually benefit them quite a bit. And one of those big trend out of New York into Florida, for example, and other sort of zero tech states, you might at least it might start abating to a degree on the back of it.

Lynne Funk (36:18):
Got it. Interesting. So let’s see, was there anything else that we didn’t talk about today that you think we should be telling our listeners?

Mikhail Foux (36:29):
I think we pretty much covered everything. We covered all groups of investors. We didn’t talk much about foreign investors, but I mean, as I mentioned, there’s one other thing that’s sort of important to them that we didn’t touch on. The fact that Moody’s is planning to stop endorsing ratings for public ratings in the UK and eu. So I mean clearly for anybody who is based in those geographic locations, and as we said, there’s a lot of foreign investors that invest in that, especially if they own Bond that just ran rated by Munis, sorry, by Moody’s. So that clearly that’s not great. So they have to change their policy or maybe they actually be forced to sell. So that’s something definitely that we have to keep an eye on. I don’t think it’s a major factor, but at least that’s something that we didn’t talk about.

Lynne Funk (37:26):
Right. Well, it’s definitely something when you think about when we started this demand and the buyer base of municipals kind of does bring it full circle that the fewer players and the more reliance on retail when things do go south or becomes pockets of these volatile times that the liquidity situation’s not great, the fewer folks you have in the room.

Mikhail Foux (37:48):
So basically buying base actually becomes much more concentrated and is much more sort of heavy retail oriented, which is again, it makes it more technical and sort of a bit of her mentality driven, which is not great clearly for any market.

Lynne Funk (38:05):
Right. We could touch on credit for a minute. Do you see any sectors or any sectors that are risks opportunities going forward?

Mikhail Foux (38:18):
So I mean we never, like CRCs, that’s one of the sectors. I mean I guess everybody under the sun. Again, you can probably find some attractive opportunities there just because everybody don’t, everybody doesn’t like the sector that much, but healthcare in general have to be careful. But maybe this sector has started showing some signs at least. So at least that’s something that we have to keep an eye on for possible opportunities. But I’m not worried about anything really at this point. You can have one-off issues, especially in some of the sectors that I mentioned also like the low end higher ed sector. I think clearly you have some issues and this upgrade downgrade trend is not favorable, but I’m not that worried overall. So if anything mini credited is fine. And that’s why when I say were you supposed to invest, I think you still should trade down in credit quality despite the fact that credit spreads tighten quite a bit. But maybe you go deeper in credit, maybe you kind of look at more kind of triple B names or even some high yield names and just see some performance that way.

Lynne Funk (39:31):
Got it. Well, Mikhail, I got to tell you, I really appreciate you coming in here and I also really appreciate the work that you all do, your weekly reports. It’s very helpful for me personally and I think for our readers too, we often quote you. Thank you. I really appreciate you coming in and thanks for your time. I don’t think any of this is going away, so this conversation will continue. Yes,

Mikhail Foux (39:56):
We’ll continue. So I just need to get my JD degree. There you

Lynne Funk (39:58):
Go.

Mikhail Foux (40:00):
My homework.

Lynne Funk (40:01):
That’s your homework. And so then you can talk with our DC bureau. Exactly.

Mikhail Foux (40:05):
Exactly.

Lynne Funk (40:06):
Excellent.

Mikhail Foux (40:07):
Thank you. Thank you very much, Lynne. It’s okay.

Lynne Funk (40:09):
Thank you so much. Take care. Thank you very much for listening to this Bond Buyer podcast. Till next time, I’m Lynne Funk.

Michael Scarchilli (40:16):
We hope you enjoyed this episode. A big thank you to Mikhail for joining us and to our own Lynne Funk for conducting the interview. Let’s review some key takeaways from this conversation. One, liquidity in the municipal market has been impacted by an evolving investor landscape. After the 2017 tax reform lowered the corporate tax rate from 35% to 21%. Property and casualty insurers and banks have reduced muni bond holdings. Additionally, stricter regulations post financial crises put pressure on banks to hold more liquid assets negatively impacting their ability to invest in municipal bonds. Two, demand in the modern day municipal market has become even more driven by retail investors. This is further influenced by trends like the growth in separately managed accounts and exchange traded funds, and three legal challenges and pushbacks from investors regarding the use of extraordinary redemption provisions to refund Build America bonds, highlight complexities and uncertainties in the market. Discussions and actions surrounding BAB Redemptions could influence the overall taxable muni market, which would in turn impact supply and demand dynamics. Thanks again for listening to this Bond Buyer podcast. This episode was produced by the Bond buyer. If you enjoyed this episode, please hit like and subscribe on your favorite podcast player and please rate us, review us and subscribe to our content at www.bondbuyer.com/subscribe. Until next time, I’m Mike Scarchilli, signing off.

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