AI is set to change the game in the muni market

While many have traditionally viewed the municipal bond market as lagging technological innovations in other markets, Artificial Intelligence appears poised to change the game.

“I do think that artificial intelligence is going to completely transform this market in every way, shape or form, everything from credit to trading,” said Barnet Sherman, professor, multinational finance & trade, Boston University. “It’s going to completely upend everything.”  

The comments came during a webinar produced by the Council of Development Finance Agencies on Tuesday. 

“I do think that artificial intelligence is going to completely transform this market in every way, shape or form, everything from credit to trading,” said Barnet Sherman, professor, Multinational Finance & Trade, Boston University. “It’s going to completely upend everything.”  

The Model Club

Rather than applying the writing skills of ChatGPT, an online tool that uses machine learning to research and produce written content from spoken prompts, some issuers and large trading houses are leveraging AI’s data crunching abilities. 

“We’re seeing a shift in concentrated institutional bond buyer landscape,” said Sherman.  ”An increasing amount of money is moving into separately managed accounts, particularly index Exchange Traded Funds, in the muni market.  That’s going to have an impact as to where the bond buyers are, how they’re going to be buying your bonds and the price that your bonds are going to be bought at.”  

Sherman believes that money managers are being pressured by tighter fees and slim margins, and are looking for automated help to make transactions happen faster, more accurately and be more trackable. 

The notion of improved tracking data in munis and the transparency that goes with it came home to roost for the industry in 2022 with the passing of the Financial Data Transparency Act. The FDTA requires that municipal securities disclosures be converted into a machine-readable format, which will also enable AI functionality. The Securities and Exchange Commission is currently wrestling with the details of putting the plan into action. 

Trading strategies are also leaning into the numbers the AI is crunching. “A lot of firms are turning to algorithmic trading,” said Sherman. “We have a huge tech war going on and if you you’re not in algorithmic trading and if you’re not using AI, you’re going to be falling behind.”    

Credit rating agencies are also taking a close look at how AI-managed infrastructure systems are being utilized by municipalities, and attaching ESG scores.  

Greg Sobel, assistant vice president, analyst, Moody’s Investors Service referenced an AI vendor who supplies budgeting software to local governments. “They use ChatGPT technology and three years of data to build budgets with accompanying narratives to explain unique scenarios,” said Sobel.  

“Their clients have reported up to a 25% reduction in the time that it takes to produce budgets and the narratives enhance transparency and disclosure, which is a credit positive from Moody’s’ perspective in terms of governance considerations.” 

The city of San Francisco and Pittsburgh International Airport are both using sensors to improve sanitation operations by sending data on how full containers are to truck dispatchers.

Los Angeles and Miami are both using AI to monitor air pollution levels. “If it can help a city like Miami minimize the effects of pollution, it’ll demonstrate that the technology can be leveraged to address these risks, which would be beneficial from Moody’s’ perspective,” said Sobel. 

Akron, Ohio, Newark, New Jersey, and Tucson, Arizona have all employed AI enabled technology in their water and sanitation departments. Akron was able to cut chemical costs by 25% or $1.2 million in 2022. 

Despite all the promise, AI also comes with an inherent increased risk of hacking. “AI use brings substantial exposure to cyber risk, and it’s largely because of the massive amounts of data that AI needs to succeed,” said Sobel. “The data represents a real treasure trove for criminals.” 

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