Mann, catherine

Foreign Investors in Municipal Bonds: New Kid on the Block?

Dr. Catherine L. Mann Barbara 54 and Richard M. Rosenberg Professor of Global Finance International Business School, Brandeis University Visiting Scholar, Federal Reserve Bank of Boston CLMann @ Brandeis.edu www.CLMann.com Global Interdependence Center Conference, Bermuda October 2013 Focus on America’s Cities

Press Commentary Rising Foreign Interest in Munis Overseas Buyers Increase U.S. Municipal Bond Holdings 15% to $83 Billion

By William Selway - Sep 18, 2010 (Bloomberg)

Foreign Buyers Eye U.S. Munis by: Robert Slavin, Sep 26, 2012 (The Bond Buyer)

Muni Bonds' Future May Lie in Foreign Investors' Hands BY: Justin Marlowe | February 2013 Governing.com

But a counterview: “The credit crisis eliminated a number of marginal demand providers…. foreign bank municipal carry trade…

By PIMCO, A New Paragdim for Municpal Bond Investing, 2012

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Flow of Funds Data Maybe rising interest in munis as a ‘no-default’ asset '$!"

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My Slide from “Debt Rating Agencies’ Role in the Global Debt Capital markets: Past, Present & Future, Global Interdependence Center, Philadelphia, February 2012

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Little Research

Muni foreign demand should be related to UST yields, taxed bonds, risk aversion, regulation, political attitudes …but no data on the demand side Implications of Foreign Investment Patterns for Federal, State, and Local Bond Financing Antony Davies [1] | Oct 2007 (Mercatus Center, George Mason University)

Be Kind to Your Foreign Investor Friends PATRICK MANCHESTER* THE GEORGETOWN LAW JOURNAL [Vol. 98:1823]

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Time for a New Look Perspectives on Foreign Exposure • Domestic perspective: – Foreign share of muni issuance

• Foreign perspective: – Munis share of foreign portfolio holdings – Foreign Private vs. Foreign Official

• Other data on trends – EMMA – Google 5

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Even Google Trends doesnâ&#x20AC;&#x2122;t find foreign interest in munis, although it does for Treasuries

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Alternative Data Source -- MSRB for the seller and the market, not the buyer Number of Trades By Trade Type- 10/04/2002 to 10/04/2013 Daily Averages

Customer Bought: 18,866 Trades; Customer Sold: 8,542 Trades Inter-Dealer: 12,174 Trades

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http://emma.msrb.org/default.aspx

To make Munis attractive to Foreigners, what would Munis be like?

• Like a UST? – Dominant for FOI; Private not so much • But munis aren’t ‘no-default’

• Like a GSE? – Quasi gov’t backstop • Backstop is no longer seen as valid • GSEs shrinking as a share of foreign portfolio

• Like an Asset Back Security?

– Sausage (bad), but acts like a bond (good) • But ABS share of Corp Bonds falling 12

To make Munis attractive to Foreigners, what would Munis be like?

• Like a Mutual Fund?

– Diversified, but exchange traded-like equity • FOI don’t like equity, Private does • Private share of total foreign portfolio ~ 65% !"#$%&'(&)'$%*+,&-'$.'/*'0&&!%/%12%3&1#2%+'$*%4& )56&)/'7&'(&)8,34&3%2#*/&

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Is the Foreign Investor the ‘New Kid on the Block?’

• Hasn’t moved in yet – Foreign is tiny share of outstanding issues – Munis are tiny share of foreigner’s portfolio

• Opportunity knocks?

– Fragmented market—issuers, buyers – Non-standard characteristics – Low liquidity

• Financial intermediaries’ role – What kind of packaged security? Equity-like or Bond-like – Marketed to foreign official or private? Preferences differ 14