Remember when the muni market was about to implode? Analyst Meredith Whitney was predicting hundreds of billions of dollars worth of defaults and the volume of primary issuance fell by 30 percent in 2011 and 35 percent in the more profitable negotiated deals, according to SIFMA. The wave of defaults never occurred. In fact, the municipal bond markets appear to be quite resilient, and one of the factors for that is an increase in muni staffing levels, says a new report by Tricumen, a UK-based research and analysis firm servicing financial firms.
Although the muni market is under pressure, Tricumen says the outlook is cautiously positive for three reasons:
- Strong secondary trading volumes
- Evolution in the investor "mix"
- And perhaps most importantly, muni staffing levels
Tricumen's analysis found that individual investors have grown in importance as buyers of muni securities and that this has been particularly useful for sell-side firms, as the bid-offer spreads that banks can charge retail clients partly offsets the decline in trading volumes. As a result, a number of investment banks have agreed distribution deals with brokers and private banks.
But the research firm says it was their analysis of muni departments’ staffing levels that suggests banks are cautiously optimistic regarding the outlook. From the end of 2008 to date, the average headcount at Barclays Capital, Citigroup, JPM and Morgan Stanley actually grew; the increase was modest, but it was in stark contrast to 5 percent to 20 percent overall headcount reduction seen in other areas.
They also note the steady growth of origination and banking headcount over the past three years indicates that the "investment banks closest to municipalities view the odds of imminent market collapse as being very remote indeed."