“With what we know of the most recent proposals, the good news is it won’t be a big impact on the market,” said Hayes. “Even if marginal rates fall for corporations, it’s not like it will impact the market, which is already pricing in lower marginal rates particularly post-election. The municipal market derives a lot of its value from where tax rates are. What could happen at a lower rate is that they let those muni positions roll off and the reinvestment then takes place in higher-quality credit.”
Another noticeable trend, according to the panelists, is banks buying a rising amount of mortgages. Also, pension funds and insurance companies are increasing demand for fixed income.
“The technicals in fixed income are like nothing I've ever seen before and the demand for income is not going away,” Rieder said. “That doesn't mean spreads can't widen for a couple of months, but if you take a supply and demand of fixed income, the demand for pension funds and insurance companies is extraordinary.”
As for the pension problem in the U.S., Hayes said BlackRock’s view on general obligation bonds compared to revenue bonds changed well before Puerto Rico’s crisis.
“To some degree it started with Detroit,” said Hayes. “We do think that the pension problem in the United States is just not being addressed. The difficulty with general obligation bonds is that there are different types of general obligation debts.”
Detroit filed for bankruptcy in 2013 and is struggling to meet its pension obligation,
Pension models of the past were built on factors that have changed, according to Hayes. Those factors include life expectancy, discount rates and the number of people paying in compared to those receiving.
“Nobody's changed the output,” said Hayes. “Until those change, I think the pension issue will continue to overhang the market, specifically in Puerto Rico.”
Puerto Rico was beginning to undergo debt restructuring before Hurricane Maria hit on Sept. 20.
“Post-hurricane bond prices have dropped quite a bit,” said Hayes. “Pre hurricane, it was about how to jump start Puerto Rico’s economy. When the hurricane hit, it changed the story from one about economic debt restructuring to a humanitarian crisis and getting basic services up to speed.”