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Speaker 2: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Alongside
Speaker 2: my co host Matt Miller.
Speaker 1: Every business day we bring you interviews from CEOs, market pros,
Speaker 1: and Bloomberg experts, along with essential market movin news.
Speaker 2: Find the Bloomberg Markets Podcast called Apple Podcasts or wherever
Speaker 2: you listen to podcasts, and at Bloomberg dot Com slash podcast.
Speaker 2: We're to join right now by Sean McCarthy, CEO at
Speaker 2: Build America Jews. Shawan, thanks so much for joining us.
Speaker 2: Thanks much for putting us up in your building.
Speaker 3: Here you Jen and Paul. It's really great to have
Speaker 3: you here. We're thrilled to be the host.
Speaker 2: One of the big stories today, Charlie Munger passing any experiences,
Speaker 2: any thoughts there. You've been in this business a long time,
Speaker 2: you know.
Speaker 3: Charlie Munger was one of the great credit thinkers really
Speaker 3: in the history of credit thinking. Last night I actually
Speaker 3: reread an essay that he gave. He wrote in when
Speaker 3: he was in his late sixties, and then we wrote
Speaker 3: when he was eighty one. It's called the Psychology of
Speaker 3: Human Misjudgment. He essentially articulates twenty five ways that people
Speaker 3: convince themselves to make the wrong decision. It's excellent. I'd
Speaker 3: I recommend. I'm sure you can get it right online,
Speaker 3: but I mean it just it shows how brilliant an
Speaker 3: individual he was.
Speaker 4: Absolutely.
Speaker 5: Yeah.
Speaker 2: But the stories we're seeing in the reporting today is
Speaker 2: really I think bring that to life for.
Speaker 5: A lot of people.
Speaker 2: All right, Build American Mutual here, tell us about your business.
Speaker 2: Tell us about really explain to our listeners kind of
Speaker 2: really what you do. How you guys are integrated into
Speaker 2: the municipal bond market in this country.
Speaker 3: Sure so. Build American Mutual is an insurance company that
Speaker 3: guarantees municipal bonds. And so essentially what we do is
Speaker 3: we act like a parent. If you you know, if
Speaker 3: you have your kids and they get a student loan
Speaker 3: and you need to co sign for that student loan,
Speaker 3: you want them to get a job and pay it back.
Speaker 3: Our job is if they fail to make that particular payment,
Speaker 3: that we make that payment for them. So our job
Speaker 3: is to sort of make bonds more secure by being
Speaker 3: double A rated or we're double A rated by Standard
Speaker 3: and Poors, and in doing that, we create greater stability
Speaker 3: in the market for the bonds, less volatility in terms
Speaker 3: of how they fluctuate. And we provide credit diligence which
Speaker 3: we share for free on our website. They're called credit profiles,
Speaker 3: a description of each deal that we underwrite, and we
Speaker 3: update that annually and it's just available as a service
Speaker 3: because we're a mutual insurance company.
Speaker 6: I love that analogy the parents of the bond market
Speaker 6: and keeping all the kids in line. But now let
Speaker 6: me ask you what's the demand for insurance in this
Speaker 6: particular type of market.
Speaker 3: So if you think about what the insurable market would be,
Speaker 3: it's not you know, for the Great Recession, municipal bonds
Speaker 3: were guaranteed up to about sixty percent of the total market,
Speaker 3: which would have been about over eighty percent of what
Speaker 3: could be insurable. So if you look at the market
Speaker 3: as a whole and you think that, you know, triple
Speaker 3: A bonds won't use bond insurance, and there are certain
Speaker 3: credits that are non investment grade or outside of the
Speaker 3: underwriting appetite of ourselves or the industry. What's left in
Speaker 3: the middle are insurable transactions. And in that area, about
Speaker 3: twenty five percent of the bonds are insurance. So that's
Speaker 3: quite a bit. That's quite a big growth. It's about
Speaker 3: a thirty percent growth since COVID started in terms of
Speaker 3: how much market penetration there is.
Speaker 2: And so does that change pre COVID the post COVID yeses.
Speaker 2: So investors demand more insurance, more guarantees, more stability.
Speaker 3: Now they're using bond insurance more than they did before.
Speaker 3: And so there's a number of things that bond insurance
Speaker 3: really does. It provides. Not only is it providing the
Speaker 3: default protection which I described as you, you know, standing
Speaker 3: behind your children and their student loans, but it also
Speaker 3: provides a stability in the market, and it provides a
Speaker 3: security so that you may not have the time to
Speaker 3: understand small or complex credits. We're guaranteeing them and then
Speaker 3: essentially what that means is we're promising to pay timely
Speaker 3: payment of principle and interest on that bond when it's due.
Speaker 3: So there's different than other forms of insurance, which once
Speaker 3: you file a claim and there's a negotiation, we pay
Speaker 3: immediately and then we mitigate later, which is one of
Speaker 3: the strengths and why in individual investors count on the
Speaker 3: strength of a financial guarantee.
Speaker 6: Can you give us a sense of what the sentiment
Speaker 6: is that you're experiencing in this market, and it's kind
Speaker 6: of like a pre and post COVID question, but also
Speaker 6: is there some key lesson about investor psychology as we
Speaker 6: started off talking about at the beginning of this segment,
Speaker 6: that you'd want to say that you've noticed.
Speaker 3: So I'd say two things. One is interest rates have
Speaker 3: gone up a lot, so the primary market, meaning the
Speaker 3: overall volume in the market for new issue has been
Speaker 3: lower for the last two or three years. That being said,
Speaker 3: the new money portion, the portion of the market that's
Speaker 3: just building new projects, new schools, new roads, this year
Speaker 3: will be its second highest year ever twenty twenty two
Speaker 3: was the highest, but there are no more refinancings if
Speaker 3: you just think about it. With interest rates going up,
Speaker 3: the concept of saving money by refinancing that bond has
Speaker 3: gone away. And that was about a third of the
Speaker 3: market historically. So that's one thing. But if you look
Speaker 3: at the sentiment in the market overall, a good example
Speaker 3: would be this last election in twenty twenty three, there
Speaker 3: were seventy percent of all bond issues that were on
Speaker 3: the ballot were approved, So that was sixty billion dollars
Speaker 3: worth of new transactions that are going to come to
Speaker 3: the market just from the twenty twenty three elections. So
Speaker 3: now we look at the credits generally and we think ourselves.
Speaker 3: Two things have happened since COVID. One is the federal
Speaker 3: government stepped in and gave an awful lot of money
Speaker 3: to all kinds of communities, and some of that money
Speaker 3: still is being spent by them. It sort of explains
Speaker 3: in one way why the bipartisan Infrastructure Bill has not
Speaker 3: actually been drawn on a lot, because the really most
Speaker 3: municipalities survived well through that crisis of the pandemic, and
Speaker 3: part of that was that they went into the pandemic
Speaker 3: being strong. I mean, you know, so you think three
Speaker 3: or four years ago, there was lots of you know,
Speaker 3: all the coffers were filled at most municipality. So now
Speaker 3: what we're looking at is to see what happens as
Speaker 3: the rest of the money that they've been given runs out,
Speaker 3: and what is the real environment for what's going to
Speaker 3: happen to municipal credits going forward. In terms of an
Speaker 3: operational standpoint.
Speaker 2: Who decides whether a bond is insured? Is it the
Speaker 2: issuer the underwriter who decides it.
Speaker 3: So nobody uses us unless we save the money. So
Speaker 3: so when when you're issuing your bond, the underwriters on
Speaker 3: the desk first, the financial advisors who advise the municipalities,
Speaker 3: we'll say you should consider bond insurance. We'll underwrite the
Speaker 3: transactions as the market. As the time comes to bring
Speaker 3: the deal to market, they'll look at it and say, well,
Speaker 3: how much is BAM charging and how much are we
Speaker 3: going to save as a municipality. So that's really the
Speaker 3: decision that's made right at the time in the market.
Speaker 3: So when markets are more volatile, bond insurance is used more.
Speaker 3: When markets are more more stable and people have the time,
Speaker 3: or when volumes are lower and more time to take
Speaker 3: a look at the credits and may say I'll just
Speaker 3: take take that bond without the insurance.
Speaker 6: It's interesting because one thing I'm wondering is about how
Speaker 6: the election next year, the US presidential election, is going
Speaker 6: to impact demand for this kind of insurance. I mean,
Speaker 6: already we're expecting maybe to market volatility with the FED
Speaker 6: shifting direction, but how does the election figure into that.
Speaker 3: So, so two things to remember. First of all, you know,
Speaker 3: people look to the federal government's role in infrastructure and
Speaker 3: it's it's the big stuff, you know, So it's you know,
Speaker 3: it's I ninety five and the Hoover Dam and big
Speaker 3: things that are done at a federal level. But you know,
Speaker 3: eighty ninety percent of what you think of as infrastructure
Speaker 3: is done at the state and local governmental level. So
Speaker 3: these things are issued by you know, towns and cities,
Speaker 3: and that's really the fundamental component. So if you look
Speaker 3: at what's going to happen in the election next year,
Speaker 3: it's really a function that resides at the state and
Speaker 3: local governmental level in terms of how the markets are
Speaker 3: going to move, and you know, what happens to interest
Speaker 3: rates overall will affect you know, volume, and whether there's
Speaker 3: a prospect of refinancing says interest rates start to decline
Speaker 3: as our prior a speaker was advocated.
Speaker 2: But I've been told by municipal bond folks that municipalities
Speaker 2: issue when they need to, not when the market's great.
Speaker 4: So I mean that's that's true.
Speaker 3: So think about what's happened. They have a lot of
Speaker 3: money volume spin down because they have had they haven't
Speaker 3: had to issue. But remember there's this whole incredibly pent
Speaker 3: up demand for rebuilding and creating new projects. And so
Speaker 3: the things to really watch for if I was an
Speaker 3: investor on the other side, is to say, Okay, what's
Speaker 3: going to happen to interest what does high interest rates
Speaker 3: do to municipalities? Well, what is it due to mortgage rates?
Speaker 3: What is it then do to commercial real estate values?
Speaker 3: What is it due to residential mortgage values? Those are
Speaker 3: some of the key underpinning issues that are that that
Speaker 3: move credits good batter indifferent.
Speaker 2: Okay, great stuff, Shan, Thanks so much for joining us.
Speaker 2: Sean McCarthy, he's the CEO of Build America. Uh, these
Speaker 2: are the offices we're hanging out in today, so we appreciate,
Speaker 2: Uh you hosting us here Sean McCarthy, CEO of Build
Speaker 2: American Mutually.
Speaker 7: You're listening to the teenth Ken's our live program, Bloomberg
Speaker 7: Markets weekdays at ten am Eastern on Bloomberg dot Com,
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Speaker 7: on demand wherever you get your podcasts.
Speaker 4: Let's go right now to our next guest.
Speaker 2: Pria Misra, Portfolio Manager, JP Morgan Asset Management, joins us
Speaker 2: here via zoom Nor. I mean, Priya, what do you
Speaker 2: make of what's happened in the rate market just in
Speaker 2: the last you know, I'm gonna say just a month
Speaker 2: in November. Boy, we've had you know, most of the
Speaker 2: yield curve was sitting right around five percent, and now
Speaker 2: we've got the ten year you know at four and
Speaker 2: a quarter percent.
Speaker 4: That's some move. What do you make of it?
Speaker 8: Sure, it's mean very volatile, pretty vicious. So I think
Speaker 8: if you go back a little bit September October, we
Speaker 8: saw a pretty big move higher in rates right from
Speaker 8: that four and a quarter all the way up to
Speaker 8: five percent. I think it was a perfect storm of
Speaker 8: stronger data, hawkish fed, more supply. I actually think the
Speaker 8: buyers got nervous. What we've seen over the last month
Speaker 8: is a reversal of all of this. So you had
Speaker 8: the US Treasury saying, well, maybe not as much long
Speaker 8: in supply. You had economic data which is slowing. I
Speaker 8: think we are going to debate for a while whether
Speaker 8: softlining or hard landing. But it's clear that the economic
Speaker 8: data is moderating, both inflation as well as growth. And
Speaker 8: then importantly in the last few weeks we've heard from
Speaker 8: the FED, and I would say in the last two
Speaker 8: days we've heard from the Fed very clearly that the
Speaker 8: hiking cycle seems to be behind us. Were end of cycle,
Speaker 8: and I think the market's now running ahead with what's next.
Speaker 8: When do the cuts start to come. So I think
Speaker 8: that the move in rates, you know, it was a
Speaker 8: technical lead move. I think beyond four forty on tens,
Speaker 8: that move was very fast. Up to five I think
Speaker 8: we've retraced it now. I think we're going to settle
Speaker 8: into a range, you know, three and three quarters or
Speaker 8: maybe four percent to four and a half or three
Speaker 8: and three quarters to four and a quarter. I think
Speaker 8: that's the ten year range as long as we're in
Speaker 8: a soft landing. If things deteriorate some more, and we're
Speaker 8: talking about the FED having to cut a lot sooner
Speaker 8: or a lot more than what's priced in, and I
Speaker 8: think there's a decent chance of that at that point,
Speaker 8: then the tenure could absolutely go closer to three percent.
Speaker 8: But I think that the data right now suggests more
Speaker 8: soft landing, and I think that's essentially what has gotten
Speaker 8: priced And so it's been a very quick move because
Speaker 8: it was a very quick move up to five percent,
Speaker 8: and I think now we can sort of consolidate in
Speaker 8: this you know, close to four percent range.
Speaker 6: You know, I want to ask you about the speed
Speaker 6: of this move. I mean, it really is breathtaking. And
Speaker 6: one question that niggles at me is what's the risk
Speaker 6: that people have got it wrong here?
Speaker 8: So I think there are a few assumptions in the
Speaker 8: market right now. Things are slowing, and I think the
Speaker 8: assumption is that we're slowing to trend and we won't
Speaker 8: slow any further. I think it's an open question. There
Speaker 8: are cracks we're seeing. These cracks could absolutely deepen. So
Speaker 8: when you talk about the you know, what could go wrong, Well,
Speaker 8: things could slow into a recession. And that's why I'm
Speaker 8: looking at every data point and digging into all of
Speaker 8: the details. I think aggregate data is useful, but we
Speaker 8: have to look at the distribution because I think, you know,
Speaker 8: when the cost of capital is high, there's a big
Speaker 8: difference between the haves and the have nots, and I
Speaker 8: think it's going to be important to look at all
Speaker 8: of that. So I think that could be one assumption.
Speaker 8: The other assumption in the last few days has has
Speaker 8: become when does the FED start to cut can they?
Speaker 8: I think the soft landing predicates on the FED easing soon,
Speaker 8: and the assumption there is that inflation is has declined
Speaker 8: and it's going to decline to two percent quickly. I
Speaker 8: think that could be a big assumption. That could be
Speaker 8: that the actual data could show that inflation may be stolen.
Speaker 8: I think the last mile of inflation is you know,
Speaker 8: there's there's some FED rhetoric that could be hargh and
Speaker 8: so I think even if things start to slow down
Speaker 8: and inflation stalls at two and a half or two
Speaker 8: and three quarters and the FED says, well, we're not
Speaker 8: at target and so we can't cut rates preemptively, I
Speaker 8: think that could be an assumption which puts the soft
Speaker 8: landing narrative at risk, so there's a lot, and then
Speaker 8: your financial conditions ease a lot, which they've been easing
Speaker 8: in the last few weeks. You could have the FED saying, well,
Speaker 8: we didn't want them to tighten too much, but now
Speaker 8: they're easing too much. So I think this dance between
Speaker 8: financial conditions and the Fed that also can go the
Speaker 8: other way if the Fed thinks the easing is too much.
Speaker 8: So it's a bit tenuous. I do think we're in
Speaker 8: the midst of the former year end rally, but I
Speaker 8: think as we start next year, we have to say
Speaker 8: your questions well put, because I think a lot of
Speaker 8: these assumptions could come could be challenged.
Speaker 4: So pre on the yield curve, here where do you
Speaker 4: see the most opportunity?
Speaker 8: So I have to say, as much as I like
Speaker 8: to position for a steepener, and we have a bit
Speaker 8: of a steepening bias in our portfolio, I think it
Speaker 8: it does depend on the FED starting to cut rates soon.
Speaker 8: So I think the curve actually need not do a
Speaker 8: whole lot in the near term. I think duration might
Speaker 8: be a better trade than the curve. I think longer
Speaker 8: turf the curve. Longer term the curve should steepen as
Speaker 8: the FED cuts rates. You know, you should have a
Speaker 8: more normal uput sloping yield curve. But we're not close
Speaker 8: to the FED target on inflation, and I think they're
Speaker 8: going to be reluctant to cut rates soon, so I
Speaker 8: think the steepening is going to run out of steam.
Speaker 8: It's s deepened a lot in the last couple of days.
Speaker 8: I think if we get we have key data points
Speaker 8: coming up in a FED meeting, so the next few
Speaker 8: weeks could steep and then I think we'll stall out.
Speaker 8: And I would prefer being long duration here. I think
Speaker 8: tens north of four percent are cheap rail rates. Ten
Speaker 8: year rail rates above two percent, I would argue that's
Speaker 8: a better risk reward than you know positioning for the
Speaker 8: curve one way or the other. But longer term, I
Speaker 8: think it should steepen.
Speaker 6: You know, we're looking at some price data coming out tomorrow,
Speaker 6: and I wondered if you could talk a little bit
Speaker 6: about what your own expectations are and then what are
Speaker 6: the risks that inflation doesn't come down as quickly as
Speaker 6: the FED would like?
Speaker 8: Sure, So I mean when I decomposed the move in
Speaker 8: inflation higher, they were supply issues and they were demand issues,
Speaker 8: the supply ones. I have a lot of conviction those
Speaker 8: issues have largely been resolved time. I mean, people spend
Speaker 8: a lot of time thinking about supply chain issues, and
Speaker 8: so I think that the base effect commodities are coming off,
Speaker 8: and so I think we have conviction that inflation's coming
Speaker 8: down from the supply side. Even labor force participation, which
Speaker 8: is a labor market supply technical has you know, did
Speaker 8: move positive on the demand side. You know, I think
Speaker 8: there has been some improvement on the demand side. Growth
Speaker 8: is absolutely slowing. Fourth quarter is probably in a one
Speaker 8: percent type GDP range, and that should put somewhat downward
Speaker 8: pressure on inflation. But there are other components. Housing it's
Speaker 8: a well documented lag in terms of how quickly housing
Speaker 8: inflation can come down, and the labor market is still tight.
Speaker 8: So I think while I do expect over the next
Speaker 8: year or two inflation to head closer to two percent,
Speaker 8: I think the speed in which it has declined this year,
Speaker 8: we might be a bit disappointed. To your question on
Speaker 8: what's the risk, I think the risk might be not
Speaker 8: so much for tomorrow. I think we probably see another decline,
Speaker 8: But I would say the risks are really asymmetric. The
Speaker 8: market is not going to like any upside risk to
Speaker 8: inflation because that puts this whole question of the FED easing,
Speaker 8: you know, making policy less restrictive. It throws that into
Speaker 8: question because the FED is very clear they want inflation
Speaker 8: close to two percent or not at two So any
Speaker 8: upside risk to inflation I think will not be taken
Speaker 8: kindly by any market. Frankly, and I think with a
Speaker 8: tight labor market, with wages still above levels that would
Speaker 8: be consistent with two percent inflation, I think the risks
Speaker 8: are still somewhat to the upside, more from a demand,
Speaker 8: you know, rather than a supply perspective.
Speaker 3: On relation.
Speaker 2: Super you mentioned the labor market's still tight. Here we
Speaker 2: have a unemployment rate of three point nine percent. Where
Speaker 2: do you think that FED would be comfortable seeing that go?
Speaker 8: So the Fed's forecast for inflation at the end of
Speaker 8: next year is four point one, which is actually very
Speaker 8: close to nahru or their estimate of the long run
Speaker 8: level of unemployment. But you asked about comfort, which I
Speaker 8: think what you're writing to get at is at what
Speaker 8: level do they get nervous about a recession or too
Speaker 8: much of a slowdown and they start to cut rates,
Speaker 8: and I would say it needs to be somewhat higher
Speaker 8: than that four point one percent. I think closer to
Speaker 8: five percent would make them uncomfortable because that's far off
Speaker 8: away from nehru. It would put downward pressure on inflation,
Speaker 8: and they certainly don't want to overshoot on inflation below
Speaker 8: two percent. And so, you know, I think if we
Speaker 8: get north of four and a half, you'll start to
Speaker 8: see some nervousness building and the FED that the labor
Speaker 8: market may be slowing faster. But again, I would look
Speaker 8: at details. If it's a rise in the unemployment rate
Speaker 8: because of participation, that's actually good news. I means people
Speaker 8: are coming back to the labor force. If it is
Speaker 8: a rise in the unemployment rate because payroll growth is
Speaker 8: slowing and we're running negative payroll growth, I think that
Speaker 8: you know, a number in that four and a half
Speaker 8: to five range, I think what is something the FED
Speaker 8: would be concerned and I think then they might be
Speaker 8: more open to cutting rates.
Speaker 6: You know, it's interesting to talk about a little bit
Speaker 6: more about the labor market because it's been through such
Speaker 6: an enormous ride this year, not just the persistently low
Speaker 6: levels of unemployment, but we're seeing so much union activity,
Speaker 6: activity amongst labor groups to look for higher wages, winning
Speaker 6: those winning those fights, as Norah was pointing out, and
Speaker 6: talk about GM earlier, and you know, I wonder if
Speaker 6: these higher prices are really just going to start to
Speaker 6: get entrenched, how quickly you know, how easy it'll be to,
Speaker 6: you know, convince people that the inflation is really going
Speaker 6: to be headed in the right direction when we've seen
Speaker 6: so many victories in the labor market, right.
Speaker 8: I think when the labor market is tight, you start
Speaker 8: to see wage pressure. We saw it in certain industries
Speaker 8: in the last two years. You're seeing it in others.
Speaker 8: As you brought up through the union side, I will say,
Speaker 8: as inflation comes down, real wage growth for the household
Speaker 8: sector has improved tremendously this year. In fact, I think
Speaker 8: that's behind why the consumer's been that resilient, that wages
Speaker 8: were not able to keep up with inflation this year,
Speaker 8: and they have, and in fact, depending on your consumption basket,
Speaker 8: you could argue that wages have been higher than inflation.
Speaker 8: But I think you hit the key point. I think
Speaker 8: for the FED to have comfort that inflation is the
Speaker 8: inflation genie is back in the bottle, and two percent
Speaker 8: is where we're headed. They'll want to see wage inflation
Speaker 8: come back down. So as important as tomorrow's number is
Speaker 8: going to be on PC, I think that wage number
Speaker 8: a week from now, average our earnings or the Atlanta
Speaker 8: Fed wage tracker, we look at ECI, We look at
Speaker 8: many measures of wages, and unless you see that heading
Speaker 8: closer to I would say ECI in the three percent
Speaker 8: year over year range, which we're above that, it's hard
Speaker 8: to see how you get inflation back down. And I
Speaker 8: do think the Fed having lost some credibility on inflation,
Speaker 8: they're going to want to make sure that they're getting
Speaker 8: all signs that inflation's heading back to two percent before
Speaker 8: they can sort of bless the market pricing of rate cuts.
Speaker 8: So yeah, wages is going to be absolutely key, and
Speaker 8: more union activity or a continued strong labor market will
Speaker 8: put that, you know, we'll have that upside risk to
Speaker 8: inflation from the labor market side. I think then that
Speaker 8: can just last longer. So it's absolutely critically.
Speaker 3: All right.
Speaker 2: Priam Miser, thank you so much for joining us. We
Speaker 2: always appreciate getting your thoughts, your perspective. Pria Misra, portfolio
Speaker 2: manager at JP Morgan Asset Management.
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Speaker 2: So we are here at the Build America Mutual HQ
Speaker 2: down and Lower Manhattan. Jennifer Ryan, Paul Sweeney here with you.
Speaker 2: We're also streaming live on that internet thing. I think
Speaker 2: it's Bloomberg TV, the kids call it. So we're talking
Speaker 2: a lot of focus here on the municipal bond market.
Speaker 2: And boy, we've got a great guest coming up. Tremendous
Speaker 2: educational pedigree. She went to some place up in Cambridge
Speaker 2: for college. I can't remember the name, but she is
Speaker 2: a graduate of the Lawrenceville School, So I fellow a
Speaker 2: lum of Lawrence. Also, we appreciate Alex Patron joining us,
Speaker 2: a director of Fixing income at Rockefeller Asset Management. She's
Speaker 2: been on the street a long time so knows this
Speaker 2: municipal bond market.
Speaker 4: I would start with volatility.
Speaker 2: Like I don't know the trading day to day trading
Speaker 2: the municipal bond market, like I know the treasury market,
Speaker 2: but the treasury market is just all over the place.
Speaker 2: I'd never seen swings like this, I mean, and I
Speaker 2: attributed to you know, my former fixed income Like I
Speaker 2: worked at Salomon Brothers. It'd be like five hundred people
Speaker 2: on the floor trading government bonds. Now there's like three,
Speaker 2: you know, So I blame the investment banks who are
Speaker 2: because of the regulations. But talk to us about the
Speaker 2: volatility in the municipal bond market. What do you guys
Speaker 2: have to deal with day to day as investors?
Speaker 9: Yeah, absolutely, Paul, great question, and you know, shout out
Speaker 9: to Lawrenceville, Alum. It's great school as well.
Speaker 8: Love that.
Speaker 9: You know, the liquidity has been much more challenged in
Speaker 9: today's environment, and it's really across the board. It's looking
Speaker 9: at treasuries, it's looking at corporates, and municipals are not
Speaker 9: unski there. So we've seen much more pronounced bouts of
Speaker 9: munis market illiquidity and volatility in twenty twenty two. And
Speaker 9: the key difference today versus when I started is the
Speaker 9: dealer desk community has shrunk in a number of ways,
Speaker 9: whether it's reducing headcounts, whether it is firms that are
Speaker 9: shutting down their desks, or ongoing m and A in
Speaker 9: the space, or just simply put, the amount of capital
Speaker 9: that's committed to being long UNI risks today is lower
Speaker 9: than it was PREGFC. That number over the last year
Speaker 9: has averaged call it somewhere between, call it twelve billion
Speaker 9: or so. We've had moments this year where it's about
Speaker 9: seven billion. We've had moments where it's closer to nine.
Speaker 9: In that environment where the municipal market has grown to
Speaker 9: four trillion, and you have tremendous rate volatility that at
Speaker 9: times might spook retail investors and lead to an outflow
Speaker 9: cycle out of call it open end funds. At that
Speaker 9: moment in time, when you have a number of investors
Speaker 9: that are looking for liquidity and really limited mount sheets
Speaker 9: in the dealer community, it creates more pronounced volatility. Add
Speaker 9: In factors there are such as as insurance and bank
Speaker 9: capital that previously might have been a backstop for the
Speaker 9: municipal market in these periods of volatility. The community to
Speaker 9: treasury ratios that you have to start to hit these
Speaker 9: days becomes a little bit higher because banks are not
Speaker 9: long as much of that risk. We saw that post
Speaker 9: SVB where banks started to really reduce their commitment to
Speaker 9: being long munis, and so from our perspective, it creates
Speaker 9: a tremendous amount of volatility, a tremendous amount of opportunity.
Speaker 9: It's really kind of interesting when you look at how
Speaker 9: both predictable the municipal market can be in periods of liquidity,
Speaker 9: but also how unpredictable, and what we're seeing right now
Speaker 9: is actually a shift in that trend. Right now, if
Speaker 9: you look at performance over the course of November, munis
Speaker 9: have outperformed. The dealer community has been stepping up and
Speaker 9: going long risk here, and you get that seasonality every
Speaker 9: single year in which calendar starts to dry up. Rates
Speaker 9: have stabilized a bit, which is really help to influence
Speaker 9: demand for risk. There's a view that maybe we're nearing
Speaker 9: the end of this rate hiking cycle, and now we've
Speaker 9: gotten to this point where it seems that liquidity is
Speaker 9: quite president this moment in time, we think that that
Speaker 9: lasts through January. But from our perspective, you know, the
Speaker 9: message is simple. There will be periods of illiquidity, there
Speaker 9: will be elevated volatility. That is an opportunity for investors.
Speaker 6: If you could talk a little bit more about the opportunity,
Speaker 6: I mean, where, broadly speaking, do you see this And
Speaker 6: I'm not just talking about you know, what sorts of issuers,
Speaker 6: what sorts of states or municipalities, but also on a
Speaker 6: relative fixed income basis.
Speaker 9: Yeah, absolutely so when we look for when we look
Speaker 9: for opportunities, we think about a couple of key things.
Speaker 9: We look at the yield curve dynamics. Where are people
Speaker 9: net sellers? Where is their best value? If you look
Speaker 9: at the shape of the municipal yield curve today, it
Speaker 9: is really interesting. I think this plays into some of
Speaker 9: what we see in the rise of separately managed accounts,
Speaker 9: maybe the decline in demand from open end funds. The
Speaker 9: municipal you'll curve, the shape of it looks like a
Speaker 9: soup ladle. That's what many of my colleagues like to
Speaker 9: call it. I typically lean towards the Big Dipper, but
Speaker 9: what you see, quite simply is the curve is inverted.
Speaker 9: You get tremendous flatness in the curve from three to
Speaker 9: ten years, and then it steepens back out a little
Speaker 9: farther out the curve. Well, what's driving that that is
Speaker 9: certainly the rise in separately managed accounts we've seen over
Speaker 9: the course of my career, the democratization of SMAs. When
Speaker 9: I started the business at Morgan Stanley, it was brokerage.
Speaker 9: It was buying and selling bonds direct out of your
Speaker 9: inventory at the bank. So that's not the case today.
Speaker 9: Fees are much lower, minimums are not slower, ladders are
Speaker 9: much more prevalent, prevalent within the market. That's what I
Speaker 9: have there. You go, we should talk about this maybe after.
Speaker 2: I tell every government New JERSEYM the largest credit or
Speaker 2: private creditor, so you better be nice to me.
Speaker 9: Perfect perfect, Well, you know they're doing much better yes,
Speaker 9: these past few years, so that's wonderful. But what it's
Speaker 9: really meant for from our perspective is it creates active
Speaker 9: It creates the opportunity for active managers to really be
Speaker 9: thoughtful around the yield curve and trying to maximize around
Speaker 9: steepness around yield, around income. On the flip side, it
Speaker 9: also means that issuers are probably going to try to
Speaker 9: think through how can we best issue in the market today,
Speaker 9: And maybe that means an increase, and we've seen some
Speaker 9: of that in the last year or two of the
Speaker 9: zero to five year issue in space as well as
Speaker 9: thinking about ten to fifteen years as trying to optimize
Speaker 9: both if you're the issue but also if you're the investor,
Speaker 9: what are.
Speaker 4: The sectors that you guys like these days.
Speaker 9: Yeah, so when we think about credit risk, we need
Speaker 9: to be mindful of the fact that credit risks are
Speaker 9: forming here. We are heading into a period of a slowdown.
Speaker 9: For me, I think we go back to the muniplaybook
Speaker 9: and what is the uniplaybook through a cycle? As you
Speaker 9: start to see economic contraction, you want to stick to
Speaker 9: high quality, large geos that have managed through, have rainy
Speaker 9: day reserve funds that have built up through through this.
Speaker 9: Now we know that sixteen states are already signaling that
Speaker 9: their economies are contraction in contract. New York is one
Speaker 9: of them. Yes, Midwest, there's a number of stats. New
Speaker 9: Jersey seems to be okay for now, so we'll keep
Speaker 9: a close eye on that. But what it tells us
Speaker 9: quite simply is we know a slowdown is coming. Essential
Speaker 9: service revenue bonds. Right, how many times have we talked
Speaker 9: about water sewer alacks through these points in the cycle,
Speaker 9: trying to stay to areas where you have steady revenue streams,
Speaker 9: where you have the ability to raise rates as needed.
Speaker 9: We know that housing is well supported here, so being
Speaker 9: mindful that in large cities, in large states, they should
Speaker 9: fare well, albeit with some structural imbalances, as rising employment
Speaker 9: costs certainly are putting pressure on budgets today.
Speaker 2: All right, great stuff, Alex Patron, thank you so much
Speaker 2: for joining us. Alex Pratrone, director of Fixed Income at
Speaker 2: Rockefeller Asset Management, A proud graduate of the Lawrenceville School
Speaker 2: in Lawrenceville, New Jersey, and I can't remember where she
Speaker 2: went to college. I think that was probably pretty good too,
Speaker 2: So we appreciate getting that.
Speaker 7: You're listening to the take kens our live program Bloomberg
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Speaker 7: thirty today.
Speaker 2: We've talked to bankers who issue this stuff, get the
Speaker 2: deals done. We've talked to investors who invest in this stuff.
Speaker 2: How about the people who actually spend the money. Now
Speaker 2: we're joined by one of those folks today, Eric Russell.
Speaker 2: He's a Treasurer of the State of Connecticut. He joins
Speaker 2: us here in our offices here of Build American Mutual.
Speaker 2: He was elected Connecticut State Treasurer in twenty twenty two,
Speaker 2: so we appreciate him making some time for us.
Speaker 4: Eric, thanks so much for joining us here. What is
Speaker 4: a baby bond?
Speaker 5: So thank you for having me. It's a pleasure to
Speaker 5: be here with you.
Speaker 10: So, Connecticut Baby Bonds is a first in the nation
Speaker 10: program that we passed in Connecticut and fully funded this
Speaker 10: show year. And the goal is really about addressing generational
Speaker 10: poverty in the state. And so for under the program,
Speaker 10: for every child born into poverty in Connecticut, it'll be
Speaker 10: thirty two hundred dollars invested in a trust on their behalf,
Speaker 10: and that money is managed by my office, and that
Speaker 10: money will grow over the life of that child, and
Speaker 10: between the ages of eighteen and thirty, individuals will be
Speaker 10: able to access those resources for initiatives that are all
Speaker 10: about helping to build wealth. So they can use those
Speaker 10: funds to help purchase a home in Connecticut to start
Speaker 10: or invest in a Connecticut business to help pay for
Speaker 10: post secondary education or job training, or to roll into
Speaker 10: a retirement account. And we know one of the biggest
Speaker 10: indicators for someone's ability to build wealth over time is
Speaker 10: to have some capital to start with. That is a
Speaker 10: piece to this puzzle, but it really fits in with
Speaker 10: Connecticut's bigger picture as we've made a lot of progress
Speaker 10: in addressing our overall fiscal health. It's also about looking
Speaker 10: to making investments in people and investing in the future.
Speaker 2: So you sold bonds to the public and took those
Speaker 2: proceeds to find this program.
Speaker 10: We actually did not, So the program was initially proposed
Speaker 10: that it was going to be bonded, so we were
Speaker 10: going to issue fifty million dollars a year for twelve
Speaker 10: years to fund the program for twelve years. In total,
Speaker 10: it was going to be a six hundred million dollar investment,
Speaker 10: and we passed the legislation back in twenty twenty one.
Speaker 10: There was some pushback to funding the program that way,
Speaker 10: and when I came into office, my main goal was
Speaker 10: to look at ways that we could fund the program
Speaker 10: and keep it viable, but also do so at a
Speaker 10: way that was most cost effective to tax payers. And
Speaker 10: so what we ended up doing, as we had a
Speaker 10: debt service reserve fund that was actually there to back
Speaker 10: bondholders from a previous bond issuance. With much of the
Speaker 10: progress that we've made in terms of our fiscal health,
Speaker 10: we were actually able to issue a surety and release
Speaker 10: the funds from that account. We actually did that through
Speaker 10: Build America, and we were able to take those funds
Speaker 10: and move them directly into the Baby Bond's Trust to
Speaker 10: fully fund it. And the benefit there was one because
Speaker 10: we are we put four hundred million dollars essentially into
Speaker 10: this Baby Bond Trust. We have a longer runway to
Speaker 10: invest that money now that we're not issuing over a
Speaker 10: twelve year window, so we're actually able to cut two
Speaker 10: hundred million dollars off the overall cost of the program
Speaker 10: as well as eliminate the interest and carrying costs for
Speaker 10: doing so, and we're.
Speaker 5: Really proud of it.
Speaker 10: We actually just received the Bond Buyer's Innovative Deal of
Speaker 10: the Year or for this transaction, and so you know,
Speaker 10: it was a really collaborative effort, but it's an exciting
Speaker 10: opportunity for our state.
Speaker 6: How easy do you think it would be for other
Speaker 6: states to replicate that. I mean, you've got to have
Speaker 6: the political will for it, but also you mentioned that
Speaker 6: to go through an unusual sort of financing moved in
Speaker 6: order to get it done. And also have you had
Speaker 6: any states call you up and inquire about it.
Speaker 10: Definitely, So we've been having conversations with several states. There
Speaker 10: were states that replicated our legislation that was passed in
Speaker 10: twenty twenty one, and some had moved that through their
Speaker 10: legislature and out of committee, but there isn't any other
Speaker 10: state that's actually fully passed the legislation or funded it.
Speaker 5: Yet.
Speaker 10: We certainly have been helpful, I am going to be
Speaker 10: I've been in touch with so treasurers that are looking
Speaker 10: at this program, and I think different states are going
Speaker 10: to look at different ways of funding it. Nevada, their
Speaker 10: proposed legislation was to bond, as we had initially contemplated.
Speaker 10: Massachusetts has a similar program that they're going to be
Speaker 10: moving through their legislature this session. But I think at
Speaker 10: its core, I think people understand that there is a
Speaker 10: really significant wealth gap in most states across the country,
Speaker 10: and it's a gap that's continued to widen, and so
Speaker 10: as we look at ways to continue to invest in people.
Speaker 10: It's about really thinking at looking at some of these
Speaker 10: more unique ways of creating more fairness and closing some
Speaker 10: of these really large wealth gaps we have across the country.
Speaker 2: All Right, stepping back as a treasure gives just kind
Speaker 2: of the state of the state in terms of the
Speaker 2: financial position of the great State of Connecticut.
Speaker 5: Sure, the state is doing well. The state's doing very well.
Speaker 10: We were able to kind of withstand the pandemic well,
Speaker 10: and it was a challenge. Obviously, we're in a place
Speaker 10: now where we've recovered all of the jobs that we lost.
Speaker 5: During the pandemic. In twenty twenty two, we've had a.
Speaker 10: Net fifty seven thousand people that moved into the state
Speaker 10: of Connecticut. And in just in terms of our overall
Speaker 10: fiscal position, I mean, we've made a lot of progress
Speaker 10: in terms of paying down long term debt and building
Speaker 10: up our rainy day fund, which we have at its
Speaker 10: maximum threshold right now at fifteen percent of our budget.
Speaker 10: And so you know, and with that we've been able
Speaker 10: to lower costs. We had the state's largest tax cut
Speaker 10: this last session. And so I think it's the state
Speaker 10: overall is doing well. There's certainly things that we are
Speaker 10: very mindful of in terms of work that we need
Speaker 10: to continue to do a big picture in our state.
Speaker 10: But I think there's been really strong support for the
Speaker 10: direction we're moving in.
Speaker 6: You know, as it's a Muni show today, I wanted
Speaker 6: to ask you about your thoughts on infrastructure investment. I mean,
Speaker 6: can you talk a little bit about what are Connecticut's
Speaker 6: needs and what are the big projects that you want
Speaker 6: to push through in the near.
Speaker 4: Term ninety five?
Speaker 5: Yeah, come on, let's be honest, for sure.
Speaker 10: So I think in looking at Connecticut, one of the
Speaker 10: big pieces is how for sure, as we're not alone
Speaker 10: in that, but I think both in terms of building
Speaker 10: more housing and bringing down the cost of housing.
Speaker 5: In our state is really a big priority.
Speaker 10: I know this is a strong commitment of the governors,
Speaker 10: and I know it's something that I think the legislature
Speaker 10: knows would be really big for us. But I think
Speaker 10: to your point, I mean transportation obviously everything up and
Speaker 10: down the nine ninety five corridor and across the state,
Speaker 10: but really, you know, improving times in terms of rail
Speaker 10: I know that we've received a lot of federal money
Speaker 10: to really improve to get more trains on the tracks
Speaker 10: and to really improve time. But I think we have
Speaker 10: to think bigger picture about these investments too, and try
Speaker 10: to look at ways to marry transit with community renewal
Speaker 10: and really investing in communities bigger picture, and so I
Speaker 10: think that's what we're going to see moving forward from
Speaker 10: an infrastructure perspective.
Speaker 2: You know, from the pandemic, we had so many companies
Speaker 2: and so many individuals leave the greater metro New York
Speaker 2: area for Florida, Texas or Tennessee. How does the state
Speaker 2: of Connecticut think about attracting and retaining companies to the state.
Speaker 2: Is it all just about tax breaks or how do
Speaker 2: you think about that?
Speaker 4: What's your strategy?
Speaker 10: So I think it's about continuing to invest in our state.
Speaker 10: And I think in we've had to look at ourselves
Speaker 10: and really address many of our kind of long standing
Speaker 10: fiscal issues as a state. I think that is really
Speaker 10: important to business. I think in our ability to lower
Speaker 10: cost long term, and so you know we've done that.
Speaker 10: I think if you look at our fiscal guardrails that
Speaker 10: were put in place in twenty seventeen, which have you know,
Speaker 10: they created caps around what we can spend, what revenue
Speaker 10: we can really count on coming in. We've been able
Speaker 10: to pay down nearly eight billion dollars in additional contributions
Speaker 10: to our pension debt under those fiscal guardrails, and so
Speaker 10: I think folks on the outside are looking at that
Speaker 10: knowing that this is a commitment for us big picture.
Speaker 5: But I think at the end of the day, we
Speaker 5: have to stick.
Speaker 10: True to our values and why we are strong as
Speaker 10: a state, and I think it's the quality of life,
Speaker 10: it's education in our state, and those are all things
Speaker 10: that we've continued to invest in.
Speaker 6: You mentioned that you mentioned the tax cut. Is there
Speaker 6: room for another tax cut something to attract companies and
Speaker 6: indeed ticket families and consumers and households of break.
Speaker 10: I think, you know, the governor is certainly looking at
Speaker 10: ways to lower cost as a whole. You know, we're
Speaker 10: in a time right now where we see revenues softening.
Speaker 10: I think this is happening across the board. What's great
Speaker 10: is that our fiscal guardrails and the budgeting measures we've
Speaker 10: put in place have us in a really sound position
Speaker 10: that even with some of these softening revenues, we are
Speaker 10: projecting surpluses. We will have the end of next fiscal
Speaker 10: year will be at about eighteen percent, so nearly four
Speaker 10: billion dollars in our rainy day fund. So I think
Speaker 10: there certainly are going to be looking at opportunities to
Speaker 10: lower cost for families.
Speaker 4: Eric, thanks so much for joining us. Really appreciate you
Speaker 4: taking the time here.
Speaker 2: Eric Russell, he's the treasurer of the State of a Connecticut,
Speaker 2: joining us here talking about the state of Connecticut and
Speaker 2: financing some of the growth initiatives in the state.
Speaker 4: We appreciate getting your time.
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