Without a dealer backstop, there have been wider swings in muni bond prices, selling off rapidly during periods of stress like the early stages of the pandemic, Yeh said. The market bounced back quickly after non-traditional muni investors like insurance companies and foreign buyers stepped in, she said.
“We do have liquidity providers out there so long as our market has the ability to trade to levels that make sense,” she said.
“It’s interesting to see how our market is reshaping and how participants who used to be super active and maybe pushed to the sidelines a little bit because we weren’t as attractive, are coming back,” she said. “Hopefully there’ll be more consistent players in our marketplace.”
How is ESG being viewed in the municipal bond market?
The ESG market is still in its “early innings” phase, according to Barney, with most calls to clients being educational, but he anticipates growth in the sector.
Yeh emphasized that the process of tailoring investments to clients’ needs takes time, and it will take even longer for there to be pricing benefits for governments who sell ESG-labeled debt.
“I think we are far away from that,” she said. “I think we as market participants have a lot more to do before issuers can expect an impact on price. There’s not enough data, not enough client interest—it will come—but not yet.”
How concerned are you of the potential for recession?
“We’ve had the benefit of seeing this before,” Yeh said. “Whether it’s a recession or whether it’s Covid, you look at the resiliency behind the muni market.”
States and cities may be entering into a potential slowdown “in such a better place than they were in a very long time and that’s going to help them navigate through a recession which we expect to be on the lighter side, if and when that does happen,” she said.
Governments are seeing healthy tax-receipts, rainy-day funds and reserve balances making them “in the best shape they’ve been in decades,” Barney said. “We’re comfortable they’ll be able to weather the storm.”
There is the possibility that muni credit has “peaked” without the likelihood of additional federal aid, Barney said. “It’ll deteriorate certainly from here, it’s just to what extent? We would have a hard time seeing a severe deterioration.”
This article was provided by Bloomberg News.