The right side of the municipal bond market inflection point

Published on 28 June 2024

The municipal bond market is at an inflection point of electronification, and investment managers who are driving change can see incredible efficiency gains, which mean savings for their end investors.

James Morris, senior VP at Investortools tells Trader TV why the bid-ask spread for block and odd lot muni trades is converging, how investors managing separately managed accounts can engage without efficiency loss and why continued electronification is imperative.

Interview Transcript

Dan Barnes Welcome to Tader TV your insight into institutional trading. I’m Dan Barnes. The municipal bond market in the states is at an inflection point in terms of its electronification. Joining me to discuss that is James Morris, senior VP at Investortools. James, welcome to the show.

James Morris Thanks, Dan. I want.

Dan Barnes To start with what is behind the compression we’re seeing in the bid-ask spread between odd lots and block trades.

James Morris Demand is driving that and I think really the key driver of demand is the ability to engage with those odd lots now at a much more efficient manner. I think historically we saw the buy side trying to engage, and it would take about, I don’t 2 to 5 minutes to write a ticket. And so they had to calculate what their time was worth. If they took 2 to 5 minutes to write a ticket for a $2 million to $5 million piece, they could get a lot more done than with, say, a $50 million piece.

Now the equation is changing because now, instead of taking 2 to 5 minutes to write a ticket with electronification of the market, they can take a few seconds and write hundreds of tickets. And so I think that kind of penalty or that cost no longer needs to be borne and so they’re willing to engage en-mass and those oddlots, very interesting.

Dan Barnes We’re also seeing the rise of separately managed accounts (SMAs), particularly in the muni space. How is that dynamic affecting the need for electronification and automation on the buy side?

James Morris Well, the rise of SMA is really being driven by what I would call the smaller account size. So the average account size across all of SMA has shrunk, because SMA managers have gone down market. But ultimately, those asset managers have had to really do more with either the same resources or even less sometimes. So you’re talking about like folks who are managing maybe 2 to 5000 accounts need to manage 10 to 20,000 accounts. So when you’re talking about that kind of growth, you just have to get more efficient in order to be competitive. You’ve got to look for more streamlined workflows and so automation is the ultimate use of technology there.

Dan Barnes What sort of efficiency gains can clients actually see from electronification?

James Morris So I’d say it depends a little bit on the product style that they’re managing. But for their SMA ladders you’re seeing 15 to 20 times more efficiency and what I mean there to quantify that really is it used to take a lot of our clients up to 45 days to get the average ladder portfolio invested, and now we’re seeing them accomplish that in 1 to 2 days.

Dan Barnes And to what extent are clients giving anything up as a result of increased automation?

James Morris My clients really aren’t giving anything up. What you need to consider is when you’re automating, what kind of flexibility does that automation provide you with? But for my clients, they are able to reflect their portfolio manager conviction and still ensure that all the portfolios are being managed to their IPS (Investment policy statement) appropriately. So their objectives and constraints are fully considered, as well as where they find unique value in the market. It’s just happening much faster than it ever used to.

Dan Barnes I’d like to thank James for his insights today, and of course you for watching. To catch up on our other shows, including Trader TV This Week at 6:45 a.m. UK time every Monday morning go to Tradertv.net.

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(municipal bond market, municipal, munis, fixed income)