The shifting sales tax revenues expectations, large infrastructure commitments, labor and materials scarcity, and changing asset utilization assumptions present additional tests for the transportation sector. Issuers and market professionals will discuss the distinctive challenges that confront California’s transportation sector and the public finance strategies being used to meet the borrowing and credit needs of the sector that keeps our economy moving.
Cities and Counties have had to question long-term revenue forecasts that were based on fundamentals that may no longer be present in their post-COVID economies. This uncertainty is particularly unsettling as COVID relief funds are spent down. Issuers, their advisors, and sector professionals will discuss their view of these challenges amidst those of the broader market, and how they are approaching new project financing and management of their existing debt portfolio.
California water and wastewater issuers count among their challenges the recurrence of drought, fundamental modification to the usage rates and patterns of enterprise services post pandemic, and significant capital requirements from a regulatory and reinvestment perspective. Issuers and other sector experts will explore the unique risks facing water and wastewater agencies and how they are using and structuring debt to mitigate a dynamic collection of risks in this sector.
Citing sustained progress on pension funding and debt reduction, Moody’s Investors Service Friday lifted its rating outlook on New Jersey to positive from stable, while affirming its issuer and general obligation bond ratings at A2.
“The positive outlook is supported by the likelihood the state will continue its current practices for managing reserves and long-term liabilities which could support improvement in the rating,” Moody’s said.
The action follows a similar one made by S&P Global Ratings last month that revised the outlook to positive from stable, putting New Jersey’s outlook at positive with all four major credit rating agencies.
The outlook boost is “further proof that the steps we’ve taken to right our fiscal ship have led to real progress,” New Jersey Gov. Phil Murphy said in a statement.
Moody’s highlighted “full pension payments and retirement of some debt” as key to affirming the A2 rating as well.
In the last two years, the rating agency said, New Jersey leveraged strong tax collection seasons to pay down billions in bonded debt while meeting annual obligation to its pension system for the first time in nearly 25 years.
“The state’s improved reserves position it to better withstand potentially less favorable economic and revenue trends in the year ahead.” Moody’s said.
On the other hand, the state’s $186 billion in unfunded pension obligations, one of the highest rates in the nation, remain as a continued Achilles heel to the state’s long term fiscal health.
“The rating continues to reflect long-term liability and fixed cost burdens that are much higher than those of most states,” the rating agency said.
The decision by Moody’s also affirmed debt issued for the Garden State Preservation Trust at A2 and bonds issued by the New Jersey Transportation Trust Fund Authority, the New Jersey Economic Development Authority, and various other state authorities at A3.
Municipals were little changed Friday to close out a month that saw triple-A yields rise more than three-quarters of a point on the front end, $7.6 billion flow out of mutual funds and issuance fall by 43%.
U.S. Treasuries were weaker and equities ended in the red after a month of central bank rate hikes, ever-increasing inflation data and resulting global market volatility.
Municipals were not immune and are poised to close out September with 3.84% losses while high-yield is at 6% in the red and taxables at negative 4.61%, per Bloomberg indices.
Ratios rose throughout the month, along with rates. The three-year on Friday was at 74%, the five-year was at 78%, the 10-year at 87% and the 30-year at 104%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 74%, the five at 78%, the 10 at 90% and the 30 at 104% at a 4 p.m. read.
With the third quarter coming to an end, “munis showed no sign of reversing the recent selloff despite a large Treasury rally on Wednesday which made munis look relatively cheaper,” said BofA strategists Yingchen Li and Ian Rogow. “To be fair, the muni market itself does not appear to be the issue.”
“Outflows from mutual funds did rise, but more in line with February and March levels and significantly lower than those from April and May,” they said. “At this point, investors are more focused on tax loss swapping and some new purchases at recent higher yields.”
And “while USTs yield volatility remains extreme, tax-exempts simply cannot keep up,” according to Barclays PLC.
Barclays strategists Mikhail Foux, Clare Pickering and Mayur Patel said “muni yields have moved higher in the early part of the week, but have outperformed.”
When UST yields fell Wednesday, munis also participated in the rally but to a much smaller degree, they said.
“Muni yields have continued to rise, reaching levels last seen in 2010,” Barclays strategists said.
“On a positive note, at current levels, interest from direct retail investors is finally starting; as high-quality five percent coupon tax-exempt bonds are starting to trade at a discount, retail have become more active and should provide some support,” they said.
In general, tax-exempts lagged USTs this week, and ratios continued moving higher, they noted.
“Muni ratios are becoming attractive across the curve, but especially for long-dated municipals,” Foux, Pickering and Patel said.
Long-dated ratios in the 110%-115% range historically have attracted crossover interest, “similar to May 2022, and now are not that far from that level,” they noted.
“The muni yield curve had become very steep until this week, when it has dramatically bear-flattened, with the 5s30s slope decreasing nearly 25bp in a very short time after the short end and the belly of the curve became pressured,” they said. They think the long end might continue to outperform but to a lesser degree.
Calendar subdued to start the fourth quarter
Investors will be greeted Monday with a new-issue calendar estimated at $3.816 billion.
There are $3.308 billion of negotiated deals on tap and $508.1 million on the competitive calendar.
The negotiated calendar is led by the $1.35 billion of GOs from New York City in two deals.
New York City will dip its toes into the social bond municipal market for the first time when it offers a $400 million taxable general obligation deal.
This is the city’s first sale of social bonds.
Proceeds from the sale of the social bonds will go to supporting more than 3,000 units of affordable housing under the mayor’s “Housing Our Neighbors: A Blueprint for Housing and Homelessness” plan.
The city also will price $950 million of tax-exempt fixed-rate bonds after a one-day retail order period on Monday.
Other notable deals include $500 million of revenue bonds from Austin, Texas, in two tranches and $308 million of unlimited tax schoolhouse bonds from the Spring Branch Independent School District, Texas.
The Bridge City Independent School District, Texas, leads a small competitive calendar with $72 million of GOs.
Maryland 5s of 2023 at 3.07% versus 2.96% Tuesday. Georgia 5s of 2025 at 3.12%-3.10% versus 2.93% a week ago. Maryland 5s of 2027 at 3.18%-3.15%. Boston 5s of 2027 at 3.16%-3.14%.
North Carolina 5s of 2028 at 3.17%. Delaware 5s of 2029 at 3.19%-3.17%. California 5s of 2029 at 3.27%.
Maryland 5s of 2033 at 3.46%. New York City TFA 5s of 2035 at 3.97%.
Texas waters 4.75s of 2042 at 4.63%-4.60% versus 4.75% original. Washington 5s of 2046 at 4.26%-4.25% versus 4.28% Thursday and 4.13% a week ago. Denver City and County 5s of 2047 at 4.20%-4.19% versus 4.25% original.
New York City TFA 5s of 2047 at 4.65%-4.63% versus 4.21% on 9/19. Los Angeles DWP 5s of 2052 at 4.30% versus 4.27% Thursday.
Refinitiv MMD’s scale was unchanged: the one-year at 3.06% and 3.09% in two years. The five-year at 3.12%, the 10-year at 3.30% and the 30-year at 3.90%.
The ICE AAA yield curve was little changed: 3.07% in 2023 and 3.11% in 2024. The five-year at 3.16%, the 10-year was at 3.36% and the 30-year yield was at 3.89% at a 3:30 p.m. read.
The IHS Markit municipal curve was little changed: 3.04% in 2023 and 3.10% in 2024. The five-year was at 3.16%, the 10-year was at 3.32% and the 30-year yield was at 3.91% at a 4 p.m. read.
Bloomberg BVAL was little changed: 3.02% in 2023 and 3.05% in 2024. The five-year at 3.10%, the 10-year at 3.24% and the 30-year at 3.88% (-1) at 4 p.m.
Treasuries were weaker.
The two-year UST was yielding 4.244% (+4), the three-year was at 4.262% (+4), the five-year at 4.072% (+5), the seven-year 3.963% (+3), the 10-year yielding 3.814% (+2), the 20-year at 4.074% (+3) and the 30-year Treasury was yielding 3.767% (+4) at the close.
Primary to come:
New York City (Aa2/AA/AA-/AA+/) is set to price Tuesday $950 million of tax-exempt general obligation bonds, Fiscal 2023 Series B, Subseries B-1, serials 2024-2047. Citigroup Global Markets.
The city also is set to price Tuesday $400 million of taxable general obligation social bonds, Fiscal 2023 Series B, Subseries B-2, term 2052. Citigroup Global Markets.
The Spring Branch Independent School District, Texas, (Aaa/AAA//) is set to price Tuesday $308.430 million of unlimited tax schoolhouse bonds, Series 2022, insured by the Permanent School Fund Guarantee Program. Jefferies.
Austin, Texas, (Aa2/AA/AA-/) is set to price Thursday $299.500 million of water and wastewater system revenue refunding bonds, Series 2022. Jefferies.
The city also is set to price $200.010 million of forward-delivery water and wastewater system revenue refunding bonds, Series 2023. Jefferies.
The Sabine-Neches Navigation District, Texas, (Aa2///) is set to price Tuesday $173.370 million of Sabine-Neches Waterway Project limited tax bonds, Series 2022, serials 2024-2042, terms 2047 and 2052. Jefferies.
California (Aa2/AA+/AA/) is set to price Wednesday $166.935 million of non-AMT veterans general obligation bonds, Series CU, serials 2023-2034, terms 2037, 2042, 2046 and 2052. Wells Fargo Bank.
The Bridge City Independent School District, Texas, is set to sell $72.400 million of unlimited tax Permanent School Fund Guarantee Program school building bonds, Series 2022, at 12 p.m. eastern Wednesday.
Baby bond programs aren’t a panacea for generational inequality, but remain a promising tool to chip away at such problems, experts said at an event this week in New York.
Tuesday’s event at the Federal Reserve Bank of New York, “Exploring Baby Bonds as a Tool to Improve Economic Security,” was organized in conjunction with Connecticut’s Office of the State Treasurer and the New School’s Institute on Race, Power and Political Economy.
Four experts were led in discussion on the history and implementation of the novel saving mechanism, first enacted in Connecticut in 2021, by Garnesha Ezediaro, head of Bloomberg Philanthropies’ Greenwood Initiative that seeks to address underinvestment in Black communities.
Opening remarks were given by Connecticut Treasurer Shawn Wooden, who was integral in helping to develop and getting state lawmakers to pass the first such state-backed program in the nation in 2021.
After an unexpected delay in the current state budget, the CT Baby Bonds program is to, as of July 1, 2023, deposit $3,200 into a trust account to be invested by the Treasurer for every newborn child whose birth was covered by HUSKY Health, Connecticut’s Medicaid and Children’s Health Insurance program.
The funds and their investment returns become available on the individual’s 18th birthday to invest in a business, help buy a home in-state, pay for college, or save for retirement.
A panel of public and private sector officials took on the subject from four different vantage points.
Professor Darrick Hamilton, the founding director of the New School’s Institute on Race, Power and Political Economy said that while baby bonds were by no means a “silver bullet” to addressing longstanding wealth inequalities in the U.S., they provide a unique answer to some of the most fundamental challenges.
By providing tomorrow’s adults with a “stock resource” they’ll be more able to withstand finical difficulties and economic downturns, which helps provide security that can study family units as well as the wider communities in which they live.
Hamilton, who along with economist William Darity first proposed baby bonds as a means to address the racial wealth gap in the United States in 2010, said the bonds also allow the average citizen a chance to take part in the economic gains of the nation. Despite the name, baby bonds are not actual bonds, but rather a publicly funded and managed investment, meaning the individual has a “chip” in the markets.
“It provides people some capital by which to take part in the changes we have set up and some of the returns to asset markets,” he said.
Also on the panel was Scott Winship, senior fellow and director of Poverty Studies at the American Enterprise Institute, who researches social mobility and the causes and effects of poverty and focuses on economic insecurity and inequality, among other poverty issues, according to his bio. From 2019 to 2020, Winship was the executive director of the U.S. Congress Joint Economic Committee under Chairman Mike Lee, R-Utah, after joining the staff in 2017.
During his tenure, Winship said he stood in opposition to several proposed social spending measures, but he stands behind the widespread adoption of baby bond programs.
“I was arguing against the expansion of the child tax credit and I would argue forcefully against the universal basic income,” he said. “We need a different set of policies to do that, and I think baby bonds have a lot of potential to fill that role. “
Baby bonds provide a long-term “remedy” by fostering upward mobility, while current anti-poverty measures do not, according to Winship.
While the national poverty rate has dropped, reaching a record low of 10.5% in 2019 before the pandemic, rates of upward mobility “have not improved over 50 years” according to Winship.
“That says to me that we’ve done some things with policy that have been effective at reducing point-in-time child poverty, but we’ve not been doing things that have managed to increase upward mobility out of poverty over the course of generations,” he said.
Courting conservative support for such initiatives at all levels of government will be key for a more widespread institution of such plans in the future, he added.
To that end, the branding of such initiatives may need to be adjusted, with “the language of initiative, upward mobility, entrepreneurship, ownership” being used to pitch the idea, Winship said.
Jennifer Ng’andu, managing director at the Robert Wood Johnson Foundation where she works to advance social and environmental changes, spoke about the historic mechanisms behind demographic wealth disparities and how baby bond programs can play a role in addressing the issue, stressing that widespread adoption might require a widespread shift in perspective.
It “requires us to think generationally,” she said. “I think that it’s hard for a lot of folks to do, particularly when you are faced with a fast-paced two years of urgency,” she said.
To start, it’s necessary to identify caregivers as “a vital part of shaping our economy” and encourage investment in them as we would with other resources at all levels of government, according to Ng’andu.
“You really need to shift the frame in context,” she said. “These children we’re investing are the human potential to solve your problems.”
Also on the panel was Todd Howland, chief of branch, development, economics, and social rights at the Office of the United Nations High Commissioner for Human Rights, who brought the issue into the international arena, connecting the aspirations of local baby bond programs to development efforts abroad.
“Human rights looks at the galloping income inequalities that exist today as a significant problem for the well-being of society and for the individuals within because it’s not sustainable,” he said, adding “it has a problem relative to historically creating conflict.”
Wealth and resource disparities are by no means localized issues, according to Howland. As the debate on how to rectify these issues increases in urgency, Howland said governments should focus on providing “useful guardrails” to create policies “before it’s too late.”
Despite an unsuccessful attempt last year by U.S. Sen. Corey Booker, D-N.J., to introduce federal-level legislation that would have guaranteed a $1,000 trust deposit for every child born in the U.S., baby bond programs are growing in popularity; according tothe Urban Institute, the District of Columbia has adopted a baby bond program, with proposals active in six states.
Jay Goldstone will stay on as a special advisor to the mayor, overseeing two massive redevelopment projects after he steps down as San Diego’s interim chief operating officer on Nov. 1.
“When Mayor Gloria asked me to be the interim COO, I thought I would be in the position for six months, now here we are 23 or 24 months later,” Goldstone said.
Gloria has selected Eric Dargan, who is relocating from Texas, to replace Goldstone as of Nov. 1. Dargan is currently the COO of the Houston Public Works Department.
“I’m honored to have been selected to help Mayor Todd Gloria carry out his big plans for this beautiful city,” Dargan said when his selection was announced on July 28.
As a special advisor, Goldstone, will continue to be paid as an hourly employee based on his COO salary. He was also an hourly employee with no benefits as interim COO, in his second stint in that position for San Diego under Gloria.
Goldstone had also worked as CFO, and then COO, for former Mayor Jerry Sanders for seven years.
The two projects that Goldstone will be working on are the Midway Sports Arena Redevelopment and the Civic Center Revitalization Project.
The Civic Center project is a six-block redevelopment in downtown San Diego that includes City Hall, city office buildings, a fire station, a civic theater and a parking structure. It also includes an office building the city just acquired as part of a lawsuit.
“We are in the early stages of deciding how we want to proceed,” Goldstone said.
At the outset of any redevelopment project, San Diego, like other California cities, has to be mindful of what is permitted under the Surplus Land Act. A law signed by Gov. Gavin Newsom in 2019 requires cities redeveloping land to include affordable housing in any project and give affordable housing developers first right of refusal.
“If this committee decided let’s not build housing, let’s just make it a civic center — that would not be permitted under the Surplus Land Act,” Goldstone said.
The city will go through the process of deciding exactly what should be part of the project, hold community input meetings, and then undergo a request for qualifications process with developer teams.
On the Midway Sports Arena Redevelopment, which is further along, the teams included an affordable housing developer, a market rate housing developer and an arena developer. Five development teams submitted proposals and the City Council on Sept. 6 selected a team called Midway Rising. The members of Midway Rising are Zepher, a market rate housing developer; Chelsea Investment Corp., an affordable housing developer, and Legends Global Development, the sports arena developer.
San Diego won’t be going after a major league hockey or basketball team for the Midway project, Goldstone said.
“We have two minor league teams, one hockey and one indoor soccer that play in the current arena, but its major draw is to host large concerts,” Goldstone said. “The project includes a 15,000- to 17,000-seat arena that can attract some big name performers.”
Both of those projects will be multi-year efforts, but Goldstone said, unlike the COO position, the job will be part-time and he can work remotely.
The Civic Center project was also the subject of several lawsuits, because of a dispute over the office building at 101 Ash Street.
The city reached a legal settlement on the project in July that “minimized the potentially substantial financial risks to taxpayers and the city consisting of years of costly litigation with an uncertain legal outcome.”
The city paid $85.999 million for 101 Ash and $45.882 million for Civic Center Plaza. Both equated to the balance due per the original deal negotiated under former San Diego Mayor Kevin Faulconer. Cisterra Development, the developer/owner, has agreed to return $7.5 million, which represent his profits on 101 Ash.
The settlement also enables the city to move forward on redevelopment of that area of downtown San Diego, where nearly 2,500 office employees work — most of them in substandard buildings that need hundreds of millions of dollars in repairs and upgrades, according to the mayor’s office.
Gloria asked Goldstone to stay on as special advisor, partly because Dargan will have enough to do familiarizing himself with San Diego operations given he is relocating from Texas, Goldstone said.
“I have been involved in these projects,” Goldstone said. “I was the city’s lead negotiator on the settlement agreement.”
The U.S. House of Representatives Friday passed a measure that keeps the government funded until mid-December and provides billions to states for disaster relief, including recovery from Hurricane Ian.
The continuing resolution will be sent to President Biden’s desk where he’s expected to sign it hours before the federal fiscal year ends at midnight Friday.
The bill keeps all federal agencies funded at fiscal year 2022 levels and features pots of new money, including $12.3 billion for the war in Ukraine. The CR does not include any new aid for COVID-related efforts, despite White House requests.
The Senate already passed the CR Thursday.
Providing funding until Dec. 16 “gives our appropriators more time to come to a funding agreement for next year,” House Speaker Nancy Pelosi said Friday during a press conference.
The CR “addresses key priorities,” Pelosi said. That includes $2.5 for disaster relief in New Mexico – which in April faced the largest wildfire in its history – and $2 billion to address housing, infrastructure and economic recovery needs for disaster recovery in Puerto Rico, Florida, Alaska and other states, she said.
The measure also provides $18.8 billion for the Federal Emergency Management Agency, which allows the agency to obligate the money for disaster relief funds. “Some of that is needed right away for Ian, but more will be needed,” Pelosi said.
The measure includes $1 billion for the Low-Income Home Energy Assistance program and $20 million to fund Army Corps of Engineers’ water and wastewater improvement projects in Jackson, Miss., which is in the midst of a drinking water crisis.
Lawmakers may return for a few days in October, but passage of the CR largely marked the close of the legislative session and official beginning of election season.
Pelosi touted the achievements of the 117th session of Congress, saying Democrats could “look back on this session with great pride.”
The stop-gap bill is needed because Congress has not yet passed any of the 12 fiscal 2023 appropriations bills. In July, the House passed six fiscal year 2023 spending bills totaling $405 billion, but that’s been the only action so far.
Mohamed El-Erian has a cautionary word for anyone anticipating an end to interest-rate increases from the Federal Reserve and other central banks.
“All of you who are looking for a pivot, be careful what you wish for,” the chief economic adviser at Allianz SE and Gramercy Funds chairman told Bloomberg Television on Friday. “This pivot only happens if you have an economic accident or a financial accident. And the journey to an economic accident or a financial accident is a very painful journey.”
The closely followed investor and strategist points to the upheaval in markets this past week, highlighted by the Bank of England intervening to stop a meltdown in gilts after a U.K. tax cut proposal, as a sign of economic fragility.
“This week has told us a lot about the transitions going on,” said El-Erian, who is also president of Queens College, Cambridge and a Bloomberg Opinion columnist. “The next few weeks are going to be pretty volatile.”
More than a year ago, El-Erian said the Fed was behind the curve in fighting the fastest inflation in decades, a prediction that came true as the central bank began a rate-hike regime in 2022 that shows no sign of stopping. Financial markets from stocks to bonds to credit have dropped in value this year and liquidity is shrinking to the point where the riskiest deals are now getting hung up.
“How do you reconcile the need to tighten monetary policy with the need to maintain financial stability?” El-Erian asked. “That tension is playing out not just at the domestic level but the international level.”
The BOE isn’t the only central bank that has intervened in markets recently, with the Bank of Japan moving to shore up its currency against a soaring dollar.
“These interventions to be clear are temporary,” said El-Erian. “It tells you that the global economy is not clearing on its own. If it is allowed to clear on its own, there’s going to be a lot of collateral damage.”
But with global inflation proving to be persistent, the Fed and its peers likely have no choice but to stick with plans for rate increases, at least for now.
“There has to be more pain before we get to a world where central banks say we are changing our inflation target,” El-Erian said. “There is a justification for changing the inflation target. [But] the credibility blow would be significant.”
September municipal bond issuance declined 43% year-over-year, with nearly every structure and sector seeing large drops, as issuers eschewed the market amid another Federal Reserve rate hike and severe global market volatility.
Third-quarter issuance was down 26% led by a steep drop in taxable and refunding volumes, according to Refinitiv data. Total issuance for the first three quarters of the year is down 14.8% from 2022, likely leading to 2022 falling short of 2021’s and 2020’s record-breaking numbers.
For the first three quarters, total issuance sits at $308.440, down from $361.932 billion in 2021. Taxables are down 48.0% to $45.724 billion from $87.979 billion.
Total September volume was $25.253 billion in 511 deals versus $44.604 billion in 1,024 issues a year earlier, according to Refinitiv data. Taxable issuance totaled $1.778 billion in 44 issues, down 84.0% from $11.098 billion in 178 issues a year ago. Tax-exempt issuance was down 29.2% to $22.987 billion in 461 issues from $32.454 billion in 838 issues in 2021.
Reversing course from the past few months, new-money issuance was down 31.7% to $18.697 billion in 470 transactions from $27.370 billion a year prior.
Refunding volume decreased 74.8% to $2.544 billion from $10.082 billion in 2021 and alternative-minimum tax issuance dropped to $489.6 million, down 53.4% from $1.051 billion.
September felt like an inflection point for the market, noted CreditSights strategist Pat Luby. Yields are trending higher, demonstrating “we’re in a different yield environment for investors,” and sizable mutual fund outflows have continued to put pressure on the market.
“It’s just been a really tough month all the way around. The volatility has increased, making it more difficult to hedge. Higher hedging costs means either less available liquidity in the secondary market or wider spreads,” he said.
“The September results are going to make all market participants, whether the buy-side or sell-side, more conservative as we move through the last through the last months of the year,” Luby said.
The muni selloff and resulting large losses in September led to the lower issuance levels, noted BofA strategists Yingchen Li and Ian Rogow.
“September is typically light anyway, only this year it is especially so,” they said.
Compounding the lighter issuance, well below the 10-year average of $32.559 billion, was September Federal Open Market Committee meeting during the second to last week of the month in which the Fed implemented its third 75-basis-point rate hike.
Usually around weeks where the FOMC meets, issuance falls, said Eve Lando, a portfolio manager for Thornburg Investment Management.
“Everyone is waiting to see, but this time in September, [issuance] just plummeted,” she said, as total volume went from $3.6 billion the week prior to $1.3 billion during the week of the FOMC meeting, according to Refinitiv. “It’s understandable and logical. Issuers wanted to avoid being caught in the crossfire that week. We’re facing a 75 basis point rate hike.”
“Only a couple of issuers sold bonds that week,” Luby said. “Even if issuers wanted to come that week, a lot of investors were rightfully reluctant to want to put money to work in advance of the Fed’s latest rate hike.”
He said it would have been “difficult for an investor to make a buy decision prior to the FOMC, unless bonds got priced so cheap, it would overcome that uncertainty.”
“It was a combination of buyer reluctance and that greater uncertainty from the Fed earlier in that in the first half that week would have made it prohibitively expensive for issuers to borrow prior to when the Fed made their announcement,” he said.
Some of the supply that would have been issued during the week of the FOMC meeting did come to market the following week — explaining the rebound in supply — but some of it was also deferred, he noted.
And while the reduced new-issue volume takes some pressure off the market by reducing supply, “it also reduces the energy level in the market,” Luby said.
“There are many investors who rely on the new-issue market, and they’re not necessarily going to shift their attention into the secondary market if the new-issue market is slow,” he said. “So even though heavy supply can oppress prices, prices may not are necessarily going to benefit from the reduction of supply.”
Looking ahead, October is historically a larger new-issue month, though next week’s calendar sits at an estimated $3.8 billion, down from this week’s $7.1 billion.
“The next one to five weeks or so would ordinarily be clear sailing for new issues to come into the market, but the volatility may affect some of those financings,” Luby said.
Lando said she sees issuance in October rebounding from September, saying if several of those prepaid deals return to the calendar, then new issuance will spike.
BofA strategists said recent market conditions may “continue into October if Wednesday’s Treasury market rally proves to be short-lived,” but “if that rally has more follow through, munis should at least stage a tactical rally as well and produce a more normal October with large issuance and active two-way flows.”
Li and Rogow estimate October total principal redemptions and coupon payments at $39 billion and new issuance of $41 billion.
Revenue bond issuance decreased 56.8% to $11.770 billion from $27.257 billion in September 2021, and general obligation bond sale totals dropped 22.3% to $13.484 billion from $17.346 billion in 2021.
Negotiated deal volume was down 48.8% to $17.944 billion from $35.017 billion a year prior. Competitive sales decreased to $7.057 billion, or 19.4%, from $8.755 billion in 2021.
Deals wrapped by bond insurance dropped 59.6%, with $1.280 billion in 86 deals from $3.170 billion in 200 deals a year prior.
Bank-qualified issuance dropped to $584.8 million in 163 deals from $1.174 billion in 299 deals in 2021, a 50.2% decrease.
In the states, New York claimed the top spot year-to-date.
Issuers in the Big Apple accounted for $40.781 billion, up 6.4% year-over-year. Texas was second with $40.270 billion, down 0.1%. California was third with $37.721 billion, down 36.5%, followed by Florida in fourth with $13.152 billion, down 4.8%, and Illinois in fifth with $10.625 billion, a 14.0% increase from 2021.
Rounding out the top 10: Colorado with $9.903 billion, down 0.4%; Massachusetts with $9.022 billion, down 3.1%; Pennsylvania with $8.220 billion, down 44.6%; Michigan at $8.194 billion, up 8.0%; and Georgia with $7.983 billion, up 22.0%.
A coalition of major issuer groups Thursday delivered a letter to Senate leaders urging them to oppose a bill that would require governments and other bond-issuing agencies to standardize financial disclosure.
The Financial Disclosure Transparency Act, which is opposed by many muni market participants, is currently attached to the National Defense Authorization Act, a bill that the Senate must pass by the end of the year and is currently expected to take up in November. Sen. Majority Leader Chuck Schumer has also said the Senate may consider it in October, before midterms.
The House in July passed the NDAA, with the FDTA attached. Sen. Jack Reed, chair of the Armed Service Committee, is still taking amendments to the NDAA on the Senate side.
The FDTA would require the Municipal Securities Rulemaking Board and other regulators to develop data standards and an implementation plan standard over the next four years that moves municipal issuers and other financial entities toward a financial reporting standard like eXtensible Business Reporting Language, or XBRL. The bill does not name a specific standard.
“The plan to attach it to the NDAA makes it so much harder to have a conversation about it because it’s moving so quickly, so we would love more time,” said a representative from the Government Finance Officers Association who is talking with senators about the bill and asked not to be named.
The GFOA is asking senators to consider several options, including – its “main ask” – that the provision be dropped the NDAA entirely, or instead first doing a study on the proposal or extending the four-year implementation timeline to up to 10 years.
The Public Finance Network is a broad range of organizations representing states, cities, airports, hospitals and utilities. A total of 18 groups signed Thursday’s letter, including the GFOA, the American Hospital Association, the American Public Power Association and the State Debt Management Network.
The four-page letter was sent to Schumer and Reed as well as Sen. Mitch McConnell and Sen. Jim Inhofe, ranking member of the Senate Armed Services Committee.
The PFN called the bill an unfunded mandate that could cost issuers up to $1.5 billion for the first two years of implementation.
Of the roughly 40,000 muni issuers, the letter estimates that 15% would have to buy new software at the cost of $100,000 per government; another 10% would need to reconfigure existing systems at a cost of $50,000; 25% would “struggle through updating their systems on their own by utilizing staff capacity at a minimum cost of $50,000;” and the remaining 50% would develop ‘shadow systems’ and use redundant processes to deal with the additional reporting needs with costs ranging from $5,000 to $100,000.
“This means that the costs for all affected public and charitable entities to comply with the mandate would exceed well over $1.5 billion within just two years and a disproportionate burden would likely be placed on smaller entities with the fewest resources,” the letter said.
The legislation would also be a federal overreach, the PFN warned, as neither the Securities and Exchange Commission nor the MSRB have direct oversight on the presentation and delivery of issuers’ financial disclosure.
The FDTA “would not conform to existing law,” the letter said. “Section 203 could irreparably breach these important guardrails that uphold congressional intent for nearly 50 years, and the tenets of federalism that are deeply rooted in our nation since its founding.”
The coalition assured lawmakers that it supports and encourages transparency and accountability in governmental financial reporting.
“However legislative initiatives like the FDTA’s Section 203 would only hinder efforts already in place, therefore we must oppose the inclusion of this provision in any matters moving forward in Congress.”
Federal Reserve Vice Chair Lael Brainard said the U.S. central bank will need to keep interest rates high for some time to bring inflation down, even as she acknowledged the need to watch global financial-stability risks from rising borrowing costs.
“It will take time for the full effect of tighter financial conditions to work through different sectors and to bring inflation down,” Brainard said. “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely.”
Brainard’s comments, delivered at a conference at the New York Fed on “Financial Stability Considerations for Monetary Policy,” underscored the resolve among U.S. central bankers to keep raising rates despite rising turmoil in global financial markets. Fed tightening has sent the dollar soaring in recent months, contributing to volatility around the world, while U.S. stocks have extended declines amid rising recession worries.
The vice chair pointed to the Fed’s latest quarterly projections for interest rates published on Sept. 21, which she said indicate “additional increases through the end of this year and into next year.”
The forecasts showed policy makers expected it would be appropriate to raise the benchmark rate by another 125 basis points over the final two policy meetings of the year — following three percentage points of increases so far in 2022 — implying a fourth straight increase of 75 basis points at the Nov. 1-2 meeting was likely.
“We also recognize that risks may become more two-sided at some point. Uncertainty is currently high, and there are a range of estimates around the appropriate destination of the target range for the cycle,” Brainard said.
“Proceeding deliberately and in a data-dependent manner will enable us to learn how economic activity and inflation are adjusting to the cumulative tightening and to update our assessments of the level of the policy rate that will need to be maintained for some time to bring inflation back to 2%.”
Fed officials have been expecting inflation to start coming down amid improvements in global supply chains after rising to four-decade highs earlier in the year, but progress has been slow. Fresh data published Friday morning by the Commerce Department showed the central bank’s preferred gauge rose 6.2% in the 12 months through August, down from 6.4% in July, but defying forecasters’ expectations for a greater moderation to 6%.
“Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out,” Brainard said. “The process of resolving imbalances will be easier the more supply improves in markets for commodities, labor, and key intermediate inputs, as is generally expected, but there is a risk that supply disruptions could be prolonged or aggravated by Russia’s war against Ukraine, COVID-19 lockdowns in China, or weather disruptions.”
Brainard has in the past been considered one of the central bank’s more dovish officials and has often highlighted the importance of global developments in setting US monetary policy. In her speech Friday, she said “it is important to consider how cross-border spillovers and spillbacks might interact with financial vulnerabilities” as interest rates rise.
But she also made clear that this time is different.
“In circumstances in which macroprudential policy cannot on its own eliminate the amplification of shocks through financial vulnerabilities, in a low-inflation environment, monetary policy has been relatively more accommodative than would be prescribed by a conventional monetary policy rule in order to reduce the likelihood of adverse output and employment outcomes,” she said.
“But in a high-inflation environment, monetary policy is restrictive to restore price stability and maintain anchored inflation expectations.”
Her message was echoed by other policy makers speaking Friday. San Francisco Fed chief Mary Daly said in an interview with Newsy that reducing inflation was the number one priority and officials are “resolute, we’re united, we’re focused on bringing those numbers down.
Richmond’s Thomas Barkin separately told a meeting of the Northern Virginia Hispanic Chamber of Commerce in Tysons Corner that “the public knows we are taking this seriously.”
The role of swaps in two lawsuits alleging fraud in the variable-rate market is expanding following recent court orders in New York and Illinois, with the potential to raise the stakes in cases where alleged damages already total hundreds of millions of dollars.
The latest developments follow earlier court rulings in July, when a New York judge initially granted the request of the accused banks, which include most of the largest banks doing business in the U.S., to seek swap-related discovery. That same New York judge, Andrew Borrok, ruled Sept. 19 that the banks cannot limit the scope of discovery sought by Edelweiss Fund, the litigant entity created by municipal advisor John Rosenberg in order to pursue multiple lawsuits related to the variable-rate demand obligation market.
“The relator has legitimate allegations that the defendants manipulated both the fixed and variable sides of the market,” Borrok ruled. “The ramifications of those allegations not only infect the individual transactions at issue, but all commercial decisions made by relator in picking fixed versus variable — including a decision to switch from one to the other. The relator is entitled to show the entire market was rigged and that any decision they made or could have made exposed them to damage. Discovery can not be used to narrow relator’s potential damage theories.”
The term “relator” in this context refers not only to Rosenberg but also to New York because such whistleblower lawsuits are considered to be on behalf of the state even if the state did not itself bring the suit. Rosenberg stands to potentially win millions of dollars for himself if his suits recover anywhere near the amount of damages alleged in the complaints.
The VRDO cases — which Rosenberg filed in several states including New York, Illinois, and California — stem from the Minnesota-based muni advisor’s claims to have discovered a “robo-resetting” scheme in which the banks “bucketed” large groups of VRDOs and set their rates en masse, without regard to the characteristics of the securities.
Rosenberg’s lawsuits argue this behavior is a violation of the agreements binding those banks to remarket the securities at the lowest rates possible and cost municipal issuers nationwide billions of dollars. In court filings, the banks have denied the allegations.
The banks, which in New York sought and won discovery of swap-related materials from municipal issuers that the banks described as “narrowly-tailored,” had argued the court should reject Rosenberg’s more broad request for materials related to swaps because he was using it as a “fishing expedition” to create new theories of damages unrelated to the accusations already under litigation.
“The court should reject relator’s transparent efforts to dramatically and improperly expand the scope of this case,” the financial firms said in a joint filing prior to Borrok’s ruling.
Rosenberg’s lawyers have told the court that including swaps in the case increases the damage calculation because issuers pay termination fees to get out of swaps. The banks have rejected this notion in their own filings, arguing that termination fees are not tied to any alleged inflation of the variable rates and are therefore not relevant.
Damages alleged in New York already approach $400 million.
In Illinois, a Cook County judge on Sept. 19 granted Rosenberg’s motion to compel discovery concerning VRDO swaps, a similar development as in New York. Damages alleged in Illinois surpass $300 million.
Federal Reserve Chair Jerome Powell has deflected requests from a top critic, Sen. Elizabeth Warren, for details of financial transactions by central bank officials, risking an escalation of tensions with lawmakers over disclosure issues.
Warren, a Massachusetts Democrat, sent letters to Powell and all 12 of the Fed’s regional branches in early August, requesting “all stock, bond, and other investment trades by senior officials” from January 2020 through August. Warren also wanted to see internal communications by Fed ethics officers warning officials away from trading in a period of Fed market intervention.
Powell, in a Sept. 16 letter to Warren obtained by Bloomberg News, wrote that the banks “have fully cooperated with the board to implement the new rules, which place the Federal Reserve’s investment and trading policies at the forefront of major US federal agencies and global central banks.” He said his letter came on behalf of the Fed system.
Powell’s letter referred Warren to disclosures already available on the web and new ethics rules being implemented by the Fed following an ethics scandal in 2021. He noted that Fed staff provided a briefing to legislative aides on the Senate Banking Committee, including members of Warren’s staff.
The Fed overhauled those rules last year after revelations about unusual trading activity by several senior officials during 2020, when the central bank was taking aggressive action to protect the economy from COVID-19. It slashed interest rates to nearly zero and unleashed emergency lending programs supporting multiple markets to protect the U.S. as the pandemic spread.
Then-Dallas Fed President Robert Kaplan and his Boston colleague Eric Rosengren both announced their early retirement following the revelations, with Rosengren citing ill health. Fed Vice Chair Richard Clarida also came under scrutiny for his transaction on the eve of a Fed statement signaling it was getting ready to calm market panic.
Regional Fed presidents file annual financial disclosures, and it is now routine for those banks to make them publicly accessible.
The Fed’s inspector general, an internal watchdog, looked into transactions by Powell’s family trust and by Clarida, and closed the investigation in July saying it didn’t find evidence of wrongdoing. Probes of senior reserve bank officials are ongoing, the IG said. The IG’s probe has been criticized as incomplete by Warren and others.
The senator criticized Powell’s latest response to her requests.
“This is the largest ethics scandal in Federal Reserve history, and I’m deeply concerned that Chair Powell risks undermining confidence in the Fed if this matter is not taken more seriously,” Warren said in a statement this week.
“The inspector general’s inadequate investigation is no substitute for congressional oversight. The Fed needs to turn over the requested information to Congress.”
The senator’s spokesman said she hasn’t received a response from a single reserve bank, nor has the Fed Board answered her request for copies of advisories from the Fed Board ethics office in March 2020.
Members of the Senate Banking Committee, which oversees the Fed, are becoming increasingly dissatisfied by what they see as Fed stonewalling on oversight requests.
Sen. Pat Toomey, a Republican from Pennsylvania, has requested information on a master account application by Reserve Trust, a financial technology firm that once included a former Fed governor on its board. Toomey’s staff has received no response.
“The Kansas City Fed has refused to turn over a single document regarding Reserve Trust’s master account application,” said Amanda Thompson, a spokeswoman for Toomey.
SOLVE Advisors, Inc., a market data platform provider for fixed income securities, has acquired fintech company Lumesis.
Lumesis’ products operations and teams will be integrated into SOLVE’s existing organization. Upon integration, the Lumesis DIVER product suite will provide additional municipal asset class workflow, analytics related to price transparency, and regulatory-related solutions to SOLVE’S Market Data Platform.
Lumesis, founded in 2010, has always been looking to expand its presence in the fixed income marketplace, said Chief Executive Officer Gregg Bienstock.
“We got to know each other, and it made a lot of sense for us,” he said of SOLVE, describing the two companies as a “complementary fit.”
Prior to the merger, SOLVE co-founder Eugene Grinberg said he had talked to Bienstock and Lumesis President and Chief Operating Officer Tim Stevens, about working together as channel partners. But in the past year, Grinberg said SOLVE, which acquired Advantage Data and Best Credit Data earlier this year, became more interested in combining with firms that have “interesting” products, a strong team and can add to its internal expertise.
“Tim and Gregg have obviously built a great business there. They’re seen as experts and thought leaders in the muni market,” he said. “This acquisition made a lot of sense.” The pricetag of the acquisition was not disclosed.
SOLVE launched in 2011 with the goal of improving price transparency across fixed income markets, primarily collecting pre-trade price data, such as bids and offers, across half a million different securities, including munis, according to Grinberg.
“Basically, a lot of fixed income markets are still very much voice and over the counter, and pricing is communicated via email often or chat,” he said. “So we work with the buy-side and sell-side to make sense of the chatter and organize price data and create workflow analytics, that ultimately saves people time.”
Grinbeg noted Lumesis’ pricing product, in particular, and some of the upgrades to it have an “interesting overlap” with what SOLVE has built.
Lumesis has expanded its data services in the municipal market over the years, harnessing technology to create more efficiency with the digital platform, which also provides users the ability to refine parameters and comparable securities to reflect their own professional judgment. The company introduced a Debt Analysis tool being integrated into its Pricing Platform to provide clients with more configurable information in the market in mid-September.
“There’s a lot of opportunity to integrate everyone’s products and create a more unified offering across fixed income markets that serve the primary and the secondary side of the business,” Grinberg said.
SOLVE’s database gives Lumesis access to data the company doesn’t have, while Lumesis’ data and technology can be beneficial for SOLVE, Bienstock said.
“It’s essentially the integration of the databases and integration of the technology, which is going to allow us to serve a broader fixed income market, instead of just the muni market,” he added.
Traditionally, SOLVE is more of a data company, whereas Lumesis’ products focus on creating workflows to serve “different use cases, different personas [and] analytics that help make sense of the data,” Grinberg said.
The initial focus, he said, is “how can we leverage each other’s offerings to make the existing products better, how can we do some quick integrations?”
For example, having the SOLVE price transparency data in the DIVER product suite will expand the ability to pull in comparable pricing to put together representative scales, the firms said.
“This is more about deeper integration between the products,” Grinberg said.”There’s a similar look and feel and it starts to look like a single unified product that serves kind of all sides of the business.”
The deal closed in the past week, and the database integration will take time. However, Bienstock noted the priority “is to leverage each other’s expertise, both technical and otherwise, to bring more to the market sooner.”
Massachusetts will hold its 10th annual Investor Conference on Oct. 20 at the Boston Convention and Exhibition Center.
Organized by the Office of State Treasurer, the event will feature three panel discussions with municipal finance leaders from the public and private sectors on a range of trending topics.
Sue Perez, Massachusetts’ deputy treasurer of debt management, will kick off the day with comments at 9 a.m., followed by the first panel, ‘Building Bridges — Community Development in Massachusetts,’ which will discuss the partnership between state and municipal officials in delivering several community-level programs that invest “millions to help boost local economies, accelerate housing production, spurs private development and creates jobs,” according to the conference’s agenda.
Michael Heffernan, secretary of administration and finance for Gov. Charlie Baker, will moderate the conversation between Ashley Stolba, undersecretary of community development, Sean Cronin, senior deputy commissioner for local services, and Mike Kenneally, housing & economic development secretary.
The second panel, ‘Another Brick in the Wall – Educating in the Commonwealth,’ will cover public funding behind “the design and construction of educationally appropriate, flexible, sustainable, and cost-effective public school facilities,” according to the agenda.
The discussion will be moderated by James MacDonald, first deputy treasurer & CEO of the Massachusetts School Building Authority, which helps finance school construction statewide. MacDonald was appointed to the position by Treasurer Deborah Goldberg in 2017 after a forty-year career in the treasurer’s office.
Participating on the panel will be Mary Pichetti, the authority’s director of capital planning, James Peyser, state secretary of education, and Rosalin Acosta, secretary of labor and workforce development.
The final panel will take a look at an area of public finance Massachusetts has championed recently, with a discussion of ESG-related investments. In August the state priced $2.7 billion of taxable business-tax backed special obligation revenue bonds in an ESG bond deal that would be the largest to ever post in municipal markets.
Kathy Bramlage, senior debt analyst at the treasurer’s office, will moderate a panel of private sector experts from different vantage points made up of Poonam Patidar, a member at bond counsel firm Mintz Levin; Zach Solomon, executive director and head of tax-exempt project finance & sustainable infrastructure at Morgan Stanley; and a still-to-be named ESG impact investor.
Following the panel will be remarks from Goldberg and closing the event will be a keynote address from Christopher Foote, senior economist and policy advisor at the Federal Reserve Bank of Boston.
Foote’s research expertise lies in housing and labor market macroeconomics and his decades-long career includes time spent time in advising the Coalition Provisional Authority in Iraq in 2003 and 2004.