Skip to Content

How Should Corporate CFOs Feel about Munis’ Rise?

Screen Shot 2015-11-10 at 11.40.25 AMDoes slow and steady win the race — again?

According to the Wall Street Journal, “investing in boring bridges and sewers is paying off once again.” We’ve come a long way since the dark days of Detroit bankruptcy, questions about Chicago, and even the continuing Puerto Rico default risk. As the WSJ writes: “Municipal bonds sold by U.S. state and local governments are returning about 2% this year, according to Barclays PLC data, beating corporate bonds and many other supposedly higher-performing asset classes.”

(Note: For more insight into Detroit’s economic turnaround, check out this conversation with Odis Jones, CEO of the Public Lighting Authority of Detroit, and Tom Green, who heads Citi’s U.S. Public Finance Infrastructure Group and led the deal that brought light back to the Motor City.)

So how should corporate CFOs feel about the rise in Munis? Specifically, what does this mean for the value and prospects for corporate debt?

The Financial Times reports that corporate bond liquidity is sinking. It quotes a Goldman Sachs report that CFOs may want to note: “Negative inventory levels mark an impressive milestone for the trending declines in dealer inventory holdings of corporate bonds over the post-crisis period. We feel fairly confident that the recent declines are the result of transitory market factors. But the more we study the problem, the more we are convinced that low market liquidity is the “new normal” for corporate bond markets.”

Further, questions around how much (and when) the Fed may raise interest rates has CFOs and corporate treasurers putting cash into corporate debt. Morningstar writes: “Until there is some specific catalyst that causes investors to rethink the amount of risk they are willing to undertake, this strong demand for corporate bonds is likely to persist. A confluence of factors has heightened demand for corporates from domestic as well as foreign buyers. Both domestic and foreign buyers are attracted to the credit spread currently offered on corporate bonds. Even though credit spreads have tightened from their recent highs at the end of September, the average credit spreads of investment-grade and high-yield indexes remain higher than their long-term averages.”