Bond Accountability Commission 2 Recommendations Page 62
key support, but in the absence of bond insurance, only at the high credit end of the market, as lesser rated issuers found barricaded doors. 61 The importance of retail investors was re-emphasized in Fall 2009. Some large institutional investors abandoned the market or reduced their holdings in the face of concerns about financial strength of state and other issuers stemming from the financial crisis or in order to take profits from the earlier market rally.62 Retail investors, then, are significant to the municipal securities market, and are becoming more important.63 It was reported in Fall 2009 that “households” own almost $1
We stand by what we said in recent issues—the recent market decline didn’t reflect a sudden deterioration in municipal credit quality, regardless of the growing budget pressure facing states and localities. Rather, investor redemptions forced big municipal funds to dump bonds in a market already struggling with liquidity issues. In addition, funds that used leverage as part of their investing strategy were sellers as well, and the decline turned into a rout. All the other factors we have discussed recently, such as the downgrading of triple-A bond insurers, contributed to the free fall. … Just as a sudden decline in the usually “stable” municipal market can be difficult to predict or understand, a gigantic rally can be as perplexing to explain. There is no doubt that smaller “retail” investors jumped into the market with a vengeance when they realized that tax-exempt yields were providing Taxable Equivalent Yields of 9% to 11% on longer-term bonds (depending on your tax bracket). … 61
Municipal Market Advisors, “Advisor” (Nov. 2008), reiterates at 1 that, “During the month it became more evident that issuers, having less than a AA rating, were penalized by higher interest rates or prohibited from access to capital.”
See, e.g., Mysak, “Loews, Guardian Join Allstate Selling Munis as Individuals Buy” (Bloomberg.com Nov. 12, 2009) (“Institutions were selling as individual investors put a record amount of more than $2 billion a week in August and September into municipal-bond funds, according to the Investment Company Institute … .”); McGee, “Allstate Favors Corporate Debt Over Munis, Real Estate Holdings” (Bloomberg.com Nov. 24, 2009).
Municipal Market Advisors, “Advisor” (Nov. 2008), states at 1, “Individuals provided the support for a calendar of $23.5B of primary issuance in November … . Institutional demand remained absent for most of the month as the remaining leveraged accounts sold selectively, mutual funds maintained outflows and property & casualty companies remained sidelined by economic adversity.”