The municipal bond market is taking a hit as Wall Street seeks to cut costs. Last week, Citi (CUS) announced that it will close its municipal bond business. The news shocked the market. Citi has been a stalwart of the $4 trillion U.S. state and local bond markets for decades, including landmark projects such as helping to rebuild the World Trade Center site and installing 65,000 street lights in Detroit.
According to a memo sent to employees, Citi CEO Jane Fraser said the business's ranking in underwriting state and local debt has dropped significantly and that "it is no longer feasible to continue in the business given the promise of improving the company's overall returns."
Citi's closure of its municipal bond business is largely to blame for higher interest rates. After the 2021 boom, major US banks are grappling with a sharp slowdown in investment banking revenues and have been cutting costs, leading to layoffs and turnover in the public finance departments of banks such as Morgan Stanley. At the same time, trading in the municipal bond market has slowed compared to before the Fed raised interest rates.
It's worth mentioning that Texas was the No. 1 market for municipal bond sales this year, but politicians in Texas and other Republican states are also hampering banks in these areas because of their dissatisfaction with the banks' attitudes toward gun and fossil fuel policies. For example, Texas froze a series of the bank's transactions in the state due to Citi's attitude toward gun policy, a move that impacted the revenue and overall profitability of Citi's municipal bond business.
The exit of the big Wall Street banks is a big blow to the $4 trillion municipal bond market, as underwriter departures are likely to persist. Only 87 companies are considered underwriters of municipal bonds this year, down 41% from a decade ago, the data showed. Fewer underwriters could ultimately mean higher borrowing costs for U.S. municipalities as they replace aging roads, fund new schools, and expand public transit.
Justin Marlowe, a professor at the University of Chicago's Harris School of Public Policy, said: "It's hard to see fewer underwriters as a good thing. He said this could mean fewer salespeople for banks to market municipal bonds to investors, leading to less demand for transactions. In addition, these big banks also play an important role in providing liquidity, and they can often intervene in the market when bonds are misplaced.
It is reported that the decline in participants in the municipal bond industry has been going on for some time, and the number of brokers registered with the U.S. Municipal Bond Rules Board (MSRB) has been declining for at least five consecutive years. Lower fees are a significant challenge, with an average of $4 per $1,000 of bond sales in 2023$92, down from $5 the year before$11.
Investment bank Stifel, which previously worked exclusively with Pennsylvania municipal authorities, no longer has a municipal bond department. UBS re-entered the municipal bond industry five years ago and hired dozens of bankers for it, but decided to exit the industry in October this year. Although UBS will no longer underwrite municipal bonds, the bank will continue to buy and trade municipal bonds through auctions.
However, not all large banks are reducing or even exiting municipal bonds. Both RBC Capital Markets and Jefferies have seen significant increases in their share of the municipal bond market. Smaller players may also benefit from the exit of large banks. Michael Decker, senior vice president of research and public policy at the American Association of Bond Dealers, which represents dozens of companies, said: "It's certainly been a bad year, with banks struggling with the challenge of low issuance, but this environment presents more opportunities for mid-sized banks. ”
Matt Fabian, a partner at independent market research firm Municipal Market Analytics, believes that now is not a good time for big banks to leave the space, as he expects a lot of ** in the next five to 10 years. Municipalities need to use the market to fund climate-resilient infrastructure and upgrade aging infrastructure, he said. This could spur new sales at a time when federal aid is about to run out. Some analysts expect the issuance environment to improve as early as next year.
This article is from: Zhitong Finance and Economics.