As the muni market continues to end the year on a strong note, market participants were wondering about what to watch out for in 2019.
One Mid-Atlantic trader said he expects 2019 to bring more regulation, resulting in less liquidity and more desk closures.
“I think there will be more regulatory emphasis on [exchange-traded products], which is counterproductive to bid-side support,” the trader said, “fewer days to settle trades, extended PMP 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 noted 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 nutshell, the muni secondary market will lose liquidity and transparency in 2019. Retail investors will pay many multiples of a markup in annual fees while losing any hope of actually having their munis ‘managed.’ ETFs and mutual funds will prosper, multiplying investor costs and draining the market of liquidity even further.”
Lipper: Muni bond funds report 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.
Municipal bonds were stronger on Friday, according to a midday read of the MBIS benchmark scale. Benchmark muni yields fell no more than one basis point in the two- to 30-year maturities. The lone remaining maturity was 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 leftover 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 Thursday, the 10-year muni-to-Treasury ratio was calculated at 86.8% while the 30-year muni-to-Treasury ratio stood at 110.3%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.
Previous session’s activity
The Municipal Securities Rulemaking Board reported 35,725 trades on Thursday on volume of $7.026 billion.
California, New York and Texas were the municipalities with the most trades, with the Golden State taking 14.862% of the market, the Empire State taking 14.265% and the Lone Star State taking 10.277%.
There are a handful of smaller deals on the schedule for next week but issuance will start back up again for real the week of Jan. 7.
Muni volume is estimated at $17.6 million, up from zero this week.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.