The recent withdrawal of Citigroup Inc., a long-standing top-10 underwriter of municipal debt, from the industry could present a challenge in the next downturn in the municipal market, according to officials at two major market participants.
“We haven’t had an event that really presses on liquidity in the market in quite some time,” said Sean Carney, head of municipal strategy at BlackRock Inc., at a public finance conference hosted by the Bond Buyer in Austin on Tuesday.
He noted that the hiring of many former Citigroup muni bankers and traders by other firms is helping the industry.
Citigroup has been a key player in the $4 trillion US state and local debt market for decades, working on major projects such as the rebuilding of the World Trade Center site and the installation of 65,000 streetlights in Detroit.
However, when the unit’s performance declined in recent years, CEO Jane Fraser decided it did not align with the firm’s goal of becoming the premier bank for large, multinational corporations.
So far, Citigroup’s exit from the market has had only a “very marginal” impact on liquidity, said David Blair, managing director at Nuveen LLC, during a panel discussion at the conference. He added, “Let’s wait and see until we get that event when it’s risk-off.”
Blair highlighted that the absence of a liquidity provider could be felt during a market downturn, as banks often step in to buy bonds when prices are volatile.
The muni market has experienced a 1.25% loss so far this year, according to Bloomberg indexes.
Despite high valuations, both Blair and Carney believe municipal bonds remain attractive.
Carney emphasized “rates over ratios,” noting that tax-free securities still offer competitive yields compared to alternatives after adjusting for taxes.
For example, a 10-year tax-exempt bond sold by CommonSpirit Health in March had a taxable equivalent yield of 5.6%.
“This is what people are looking at in the market,” Carney said.
Blair added that this year’s increase in yields presents a “tremendous” investment opportunity within municipals.
His team favors high-yield municipals, given the low risk of a recession, and bonds maturing in five to 10 years due to selling pressure in that part of the market.
