Market begins to coalesce after Citi's exit, but true liquidity test yet to come

BY SourceMedia | MUNICIPAL | 05/07/24 11:20 AM EDT By Caitlin Devitt

Broker-dealer firms are stepping up in the primary market to fill the gap left by Citi's dramatic exit from the municipal bond business last December, but a test of how secondary market liquidity stands up to the firm's departure remains to be seen.

That's according to broker-dealer and financial advisor panelists speaking Monday at the Bond Buyer's Southeast Public Finance conference in Hollywood, Florida.

"Citi had the biggest balance sheet on the street no doubt about that," said Ron Banaszek, senior vice president and lead underwriter at Blaylock Van LLC. "The market hasn't challenged the remaining muni participants yet," Banaszek said. "It'll be very interesting to see when an event happens or the market get sloppy, what the secondary market does."

Jerry Ford, president of Florida-based financial advisory firm Ford & Associates, Inc., said his firm has spent a lot of time recently talking to muni fund portfolio managers around the country asking "who do you see that's taking risk in the market," Ford said.

"The answers are interesting ? they clearly segregate between the primary market where they see a number of people stepping up and the secondary market, where broker-dealers are taking less risk than they did before, especially since Citi left," he said. "We know that has an impact, because a healthy secondary market translates into what you're willing to do in the primary market."

The muni market is "in a period of transition," where it's converging toward other markets like the corporate bond market, said Rob Dailey, head of public finance at PNC Financial Services (PNC). "There's an emphasis on liquidity, forcing dealers to step up ? that's something that we're not going to reverse out of," Dailey said.

A firm's relationship in the secondary market benefits its primary market activities, said Gary Hall, partner and president, at Siebert Williams Shank & Co., LLC. The firm has worked to "beef up" its secondary trading in light of the growth of separately managed accounts, Hall said.

"During COVID we made a concerted effort to make sure we traded in block sizes that worked for them," Hall said. "That works for us in the primary market too," he said, because the firm can boost certain maturities. "Having a robust secondary trading platform has helped our primary clients."

Strong ties to the buyside are an increasingly important part of the primary market story, said Hall and other panelists.

"We're spending a lot more time with buyside portfolio managers and their analysts," Hall said, noting that two similar credits may see different pricing "based on the ability to sell the story."

"The amount of buyside market intelligence we pick up from being involved in the secondary market is immeasurable, so when we are underwriting deals we know what the buyside is doing, what their tolerance is, what their cash position is," said Banaszek. "As you put together a syndicate you have to look to firms that have a relationship on the secondary market."

The ability to tell a story to the investors is even more important in a market that's relatively volatile, like it has been over the past few years, said PNC's Dailey.

"Did you convey your story well?" Dailey said. "Do you have clear communication among the syndicate and with investors? It all becomes much more important in a volatile market."

The Securities and Exchange Commission seems bent on homogenizing all of the markets, Ford said. "They're not as concerned about the unique attributes of the municipal market as they are about having everyone look the same," Ford said, adding that may benefit the largest issuers "but who it leaves out in the cold is all the thousands of smaller issuers who don't fit in the homogenous mold."

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.