00:00So, Matt, we've seen a lot of volatility in the rates market. How has that affected the muni market, if
00:05at all?
00:05Well, thank you for having me. And to this point, I would say we've seen a lot of rate volatility
00:10over the past two months.
00:12And we've seen real minimal impact to the performance of the muni market, which is a little contrary to what
00:18we might expect.
00:19You know, historically, when we have the front end of the interest rate curve selling off as quickly as it
00:24did,
00:24we've seen a widening of muni ratios and a deterioration of investor demand, outflows from mutual funds and ETFs.
00:32Specifically, when we went back to Liberation Day last year, we saw some of those effects.
00:37We haven't seen any of that. The muni market continues to operate very efficiently and very robustly.
00:44A new issue is coming to market. It's being met with ample investor demand.
00:48Secondary trading flows remain strong and valuations, particularly inside of the 10-year point of the curve, remain, you know,
00:57I would say very investor friendly here.
01:00And we talked about how there's going to be this massive renovation project at Penn Station.
01:04There are other transportation hubs that are in need of renovation as well.
01:08So there's a lot of need for funding there. How much demand is there for something like that?
01:14Or is it a case of people looking for specific projects in their home state?
01:19So investor demand right now, I just think given the yield that can be delivered in the municipal market,
01:25whether it's in the taxable space or in the tax-exempt space, is quite robust,
01:30especially given that a lot of these infrastructure projects,
01:33that are going to look to sell their debt out past 10 years, out to the 30-year part of
01:37the curve,
01:37that's where municipal ratios are actually as attractive as anything right now.
01:43I think that from an issuance perspective, you're going to see a lot of new issuance around infrastructure.
01:50And I think the demand, I think the borrower demand for dollars is going to be much higher
01:56because if you look at over the past five years, construction costs have gone up a lot.
02:00Input costs have gone up a lot.
02:02And then you look at everything that's happening in digital infrastructure,
02:05you're competing with all the construction related to data centers and supply chain around that.
02:11So the need for new money in the municipal market, I think, could be quite high over the next three
02:17or four years.
02:18We also have a lot of states pushing through wealth taxes or some form of wealth taxes
02:23or considering adding wealth taxes.
02:25What does that do in terms of stoking demand for munis in those specific states?
02:29So generally speaking, some of the states that have had various noise around these wealth taxes,
02:37we've seen minimal impact to spreads.
02:40The market still continues to operate very robustly.
02:43We continue to see the ability to place debt.
02:46And a lot of these states that do have some of these backdrops,
02:51they're still functioning quite well from a credit quality and from a balance sheet perspective.
02:57If you think about the overall GDP of the economy, the overall economic performance, corporate earnings are quite good.
03:04So they're taking in still healthy revenue across the board.
03:08It hasn't put a lot of strain on their ability to issue debt.
03:11Gotcha.
03:12I also want to talk about market structure.
03:14I co-host the ETF IQ show on Mondays and we talk a lot about munis.
03:18There's always a lot of demand to talk about muni ETFs.
03:22What does the growth of muni ETFs mean for this industry?
03:26Is it the product that is stoking demand or is it the asset class that is creating a demand for
03:35the product, for ETFs?
03:37So if you look at the muni market, over the last five years, annual volumes have increased 125%.
03:44And where that has been most prevalent is in smaller lot sizes, so trades of less than a million.
03:50And what we've seen is we've seen a shift from traditional mutual fund demand to both ETFs.
03:57And if you look at ETF inflows, they're actually higher this year than mutual fund inflows, but also separately managed
04:04accounts.
04:04So because of technological advances, a lot of institutional money managers are now allowed to offer separately managed accounts to
04:13individual investors at scale,
04:16which means they can purchase $500 million of a municipal security, they can divvy that up in $100,000 lots,
04:22and then obviously that creates the smaller pieces trading around the market.
04:26So what we've had to do is, from a market structure perspective, is we've had to adjust our trading architecture
04:33to fit all of these smaller pieces
04:36and higher trade count going through the pipes.
04:38That requires enhanced algorithmic trading, ability to commit to more portfolio trading,
04:45as well as having the right pipes with all of our core clients.
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