Portfolio Manager: Brace for a big summer of debt issuance

Published on 8 July 2024

Sweta Singh, founding partner and portfolio manager at City Different Investments, urges trading desks to prepare for a potentially big summer of debt issuance, ahead of election volatility that’s expected in the fourth quarter of the year. Singh further looks at why July is also geared up to be a big month for the municipal market in the US and unpacks how her firm is staging its portfolios this week and for the upcoming months.

As elections continue to dominate news cycles this year, she looks at how that will influence her buy side’s investment and liquidity outlook for 2024.

In this episode and for the bonus question, Singh delves into where she is seeing the most interesting changes to market dynamics in fixed income and the potential risks that come with the accelerated push to electronify the debt markets.

Interview Transcript

Jo Gallagher Welcome to Trader TV This Week your insight into how trading desks can prepare for the week ahead I’m Jo Gallagher. Today I’m joined by Sweta Singh at City Different Investments to discuss the main topics and events leading this week. Sweta, welcome to the show.

Sweta Singh Thank you.

Jo Gallagher To start off, how are you staging your portfolios and advising trading desks going into this week and the second half of the year?

Sweta Singh So last week for the US at least, it was a light trading week because of 4th of July. I think you guys on the other side of the pond had the bigger news with the landslide election bringing it back to the fixed-income market, though I think the biggest news was Chair Powell speaking in Portugal, where he talked about the progress made towards price stability. And the key word here is progress.

However, the chair was very clear in not establishing a direct relationship between the progress to price stability and rate cuts. The Fed remains data dependent. For its part, however, the market has priced anywhere between 1 to 2 rate cuts for the year. Now, how do we take all of that and process it at City Different Investments.  We are a total return manager, which means we take risk only when we are paid to take that risk.

The way we employ that in our portfolios is by using an actively managed ladder strategy, because the ladder is a good hedge to asymmetrical changes along the yield curve. In all of our strategies, we are midpoint neutral in terms of duration to be able to be nimble and take advantage of any steepness in the yield curve that we might see in the second half of the year.

Jo Gallagher July is a big month for the munis market in the US. Tell us why that is and what your trading desk be paying attention to?

Sweta Singh The municipal market has become more of a technicals market, by which I mean it’s more of a supply-demand-driven market. And there are two specific timeframes during the year that it becomes interesting, which is the January-February time frame and the June-July time frame, which is where coupons come up for reinvestment along with redemption money.

So what that does is it creates a supply-demand imbalance where the demand side is tilted. A lot of demand, but maybe not enough supply, which is usually the story. So for this year, between June to August, we have somewhere around 110 billion up for reinvestment. So that’s the demand side of the equation. And summer is usually a slow supply period for issuers.

However, 2024 summer is super interesting because this is an election year. And what that means is maybe the issuers who are trying to avoid volatility surrounding the election may push issuance closer to the summer. So I think this will be an interesting summer to watch in terms of more supply coming in.

Jo Gallagher Liquidity in fixed income has been exceptional for the first half of the year. What are your expectations for the second half?

Sweta Singh I’m going to equate liquidity to supply because it’s been a normal year in terms of liquidity and I think supply has been the big story. Last year was a rising rates environment and all eyes were on the Federal Reserve.

In 2024, I think the issuers accepted the fate of higher for longer and could no longer hold on to their capital needs and to their capital plans, and they came to market with bonanza issuance in the first half of the year, both in the IG space and the municipal space. On the IG side, the supply slated for the year is somewhere around 1.45 trillion. But most of that issuance, over half of it has already taken place in the first half of the year. Municipal market.

We’ve seen a decent supply in the first half. I think the entire year is slated somewhere around 460 billion, which is a decent issuance. And again, the second half, especially around November with the election volatility, I do think that the issuers will push out issuance in late summer and summer of 2024.

Jo Gallagher How are you preparing for election volatility for the rest of the year?

Sweta Singh The U.S. presidential elections will have far reaching macroeconomic impact for the next year or two and beyond. Policies like immigration, trade, competition policies will have deep repercussions. And whoever wins the presidential election and also, let’s not forget, the congressional elections will have to face a new fiscal, actually a daunting fiscal reality once they are in office.

In terms of portfolio positioning, City, Different Investment, staying as close as possible to that midpoint neutral duration, helps us be really nimble to take advantage of volatility in how the second half of the year plays out, not just in terms of the monetary policy with what the Fed does, but fiscal policies as well. Not to mention geopolitics, the volatility meter is pretty high in the second half of the year.

Jo Gallagher More broadly, there’s been a major push for electronification in fixed income. What are some of the most interesting changes that you’re seeing in market dynamics and trading in that space?

Sweta Singh City Different investment as a boutique firm, we are super excited about having access to liquidity. That is what these platforms are providing. Great equalizer, democratizing the marketplace to all players alike. That has just been truly fantastic.

In terms of electronification on the fixed-income side for IG, I think the numbers run anywhere between 30 to 35% of the market is electronically traded on the muni side, closer to 20%. So good progress has been made there, and I think there is a lot of room to grow.

Something that I do worry about, however, is the shrinking broker-dealer balance sheet and how it plays out in the marketplace. You know, earlier we had dealers stepping in in times of market dislocation, providing liquidity. Now with electronification of trading, there are all these marketplaces where different players are providing liquidity to each other. However, we’ve not been tested in terms of a credit squeeze, credit crunch like we saw in the GFC. We did see a localized crunch, if you will, in the banking skirmish of 2023, right? If you held on to those bank names and were looking to trade, there was liquidity in those names, but not on the marketplace channels.

It was through your relationships where you had to pick up the phone. So for the future, my hope is that the marketplace adapts itself to being able to be a robust provider of liquidity in terms of credit squeeze, credit crunches, and that’s something that I think we will be looking to the future and keeping an eye on how that evolves and shapes.

Jo Gallagher Thank you, Sweta, for your insight, and of course you for watching, this has been Trader TV This Week.

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