The recent exit of Citigroup Inc. (C, Financial) from the municipal debt underwriting sector could potentially lead to challenges during future market downturns, according to key figures at two leading market participants. This move marks the departure of a historically significant player in the $4 trillion U.S. state and local debt market.
At a public finance conference held by the Bond Buyer in Austin, Sean Carney, the head of municipal strategy at BlackRock Inc. (BLK, Financial), highlighted the lack of recent liquidity stress events in the market. He noted, however, that the absorption of Citigroup's municipal team by other entities might mitigate potential industry difficulties.
Citigroup has been a dominant force in financing major U.S. projects, such as the World Trade Center reconstruction and the Detroit streetlight renewal, with 65,000 streetlights installed. The decision to exit the municipal bond market was part of a strategic shift by Citigroup's CEO, Jane Fraser, aiming to refocus the bank's services towards large, multinational corporations.
David Blair, a managing director at Nuveen LLC, mentioned during a panel that Citigroup's departure has so far had a minimal impact on market liquidity. However, the true test of this impact will come during a market downturn, which is typically when banks' role as liquidity providers becomes most critical. Despite a 1.25% loss in the muni market this year, according to Bloomberg indexes, the sector still holds appeal due to its high valuations.
Both Blair and Carney remain optimistic about municipal bonds, citing their attractive yields after tax adjustments. For instance, a tax-exempt bond issued by CommonSpirit Health in March boasted a taxable equivalent yield of 5.6%. Blair also sees a significant investment opportunity in high-yield municipals and bonds with five to ten-year maturities due to current selling pressures.
Additionally, the discussion touched on the controversy surrounding the refinancing of Build America Bonds. Despite some investor pushback, Blair is skeptical of their objections holding up against recent refinancing deals, such as one by the University of California.
Carney anticipates a slowdown in new deal issuances, projecting a shift towards the latter half of the year and extending into 2025. He also emphasized the importance of moving out of cash positions in anticipation of Federal Reserve rate cuts, which would affect front-end yields. Moreover, he pointed out a divergence in credit quality among munis, especially between states reliant on income taxes versus those dependent on consumption taxes.
