Fall 2020Fixed Income InsightsMarket Intelligence / DC PerspectiveTable of Contentswww.bdamerica.org

What's Inside...Featured Interviews

• A View From the Top: A Q&A with Hilltop Securities' new leader, Brad Winges
• Fixed Income Regulation and Market Structure - a Discussion with FINRA CEO Robert Cook (webinar)
• The Search for Relative Value Across Fixed Income Markets with Spencer Lee of Agilon Capital (webinar)

ContentsMunicipals

• The Gap Between Now and Some Likeness of Normal Life. By Tom Kozlik, Hilltop Securities
• Solving the Municipal Market's Fundamental Credit Data Problem. By Triet Nguyen, DPC Data
• What Have We Learned about Disclosure and Due Diligence from the COVID-19 Pandemic? By Nixon Peabody
• 22 Factors for the Muni Market to consider as we approach 2021. Crosscurrents abound. By George Friedlander

Regulatory

• A New Day for Muni Market Regulation with Mark Kim, CEO of the Municipal Securities Rulemaking Board (webinar)

Treasuries / Agencies

• Market Observations, Issuance Expectations and Their Focus on Counter-Parties, Whether Wall Street or Regional Dealers with Randy Snook, CEO of the FHLB Office of Finance (webinar)

Corporates

• Electronic Taxable Bond Trading: Choose Wisely. By David Parker, MTS Markets
• The Fed's Corporate Bond Purchases And Their Impact On Corporate Bond Issuance. By Seeking Alpha
• Corporate and Government Bond Market Structure – Economic Turbulence, Stimulus, and Fed Programs. (webinar)

Politics

• Political Overview – What to Make of the National Elections with Nathan Gonzales (webinar)
  
• BDA's Tax Policy and Municipal Bonds

BDA Member News and Profiles

• BDA Member Profile: Axetrading
• Broadridge's AI-driven Corporate Bond Trading Platform LTX® Selects 7 Chord as Third-Party Pricing Provider - Platform offers greater insights into pre-trade liquidity. By Broadridge Financial Inc.
• BDA's Taxable Advocacy

Off the Desk

• Stop Asking for Easy: A Manifesto for Doing Hard Things Voluntarily
• Yeti Cycles
• Mountain Biking Colorado

Thank you to all the sponsors of the BDA's National Fixed Income Conferencewww.bdamerica.org

Cover Story: “A View from the Top” - Q&A with Brad WingesBioBrad Winges is President and Chief Executive Officer of HilltopSecurities. He has more than 30 years of experience in the financial services industry. Before joining HilltopSecurities, he served as senior managing director at Piper Jaffray where he was a member of the leadership team. During his time there he served as head of fixed income services, firm investments and trading, president of Piper Jaffray Investment Management, and head of municipal sales and trading, among other roles. He has also led the firm’s risk management efforts and balance sheet investing and funding. Early in his career while at the Chicago Mercantile Exchange, he was one of the youngest futures and licensed seat exchange traders in the United States.

Winges is a past two-term chairman of the Bond Dealers of America (BDA) board of directors and currently serves on the board’s executive committee and as co-chair of the BDA’s fixed income market structure committee. He is a founding member of the American Securities Association and was appointed to the Securities and Exchange Commission’s fixed income market structure committee earlier this year. He is also a member of the Gillette Children’s Specialty Healthcare board of directors. He is a former member of the Chicago Board of Trade and the Chicago Mercantile Exchange. Winges earned a bachelor of science in economics and finance from the University of Wisconsin – Madison.

Education
Bachelor’s degree in economics from the University of Wisconsin - Madison.

Current Affiliations
Past two-term chairman of the Bond Dealers of America (BDA) board of directors; member of the BDA board’s executive committee; co-chair of the BDA’s fixed income market structure committee; founding member of the American Securities Association; member of the Securities and Exchange Commission’s fixed income market structure committee.Q & AThank you, Brad. The BDA is really pleased to feature you and HilltopSecurities in the first edition of Fixed Income Insights.

Q: You spent a large portion of your working career at a Midwest investment bank and in late 2018 you chose to make a move to HilltopSecurities in Dallas. What was the catalyst for making that move?

A: The opportunity to lead HilltopSecurities was simply too good to pass up. The firm had a diverse mix of business lines and all of the components to establish itself as the nation’s leading municipal investment bank. With my background and experience, specifically with a focus on municipals and fixed income, I felt I could be of value in defining the vision and growing the firm.

Q: You took over one business but really the combination of three regional BDs, now owned by a financial services holding company anchored by a strong commercial bank. Can you talk a little about inheriting and then managing that workplace and culture given you have professionals from the former First Southwest Company and former Southwest Securities, as well as ML Stern in California?

A: In 2008, the firm acquired ML Stern, a large municipal retail firm in Beverly Hills, CA. Then in 2016, First Southwest and Southwest Securities completed their merger to become the combined entity named HilltopSecurities. When I joined the firm, we were completing the final stages of our back office and infrastructure conversion while Hilltop Holdings, the financial services parent company, was also in the process of implementing a shared services model to provide key support functions for all its subsidiaries. Together, our family of companies employs approximately 4,800 people in 48 states, supported by the capital strength and momentum of the holding company. It was a perfect time to bring HilltopSecurities together around one culture and one brand with one clear message – we don’t follow the herd, we lead it.

Q: Fast forward to today. Can you talk a little about your strategic vision and plan for HilltopSecurities, and how COVID and the displaced workforce has impacted these plans and your business overall?

A: HilltopSecurities is certainly in growth mode, adding depth to our leading position in municipal finance, housing finance, clearing services, and wealth management. As the nation’s number one investment advisor to public entities, we’re focused on bringing our full suite of municipal services and support to issuers across the nation as a solution provider. We offer a multitude of financial capabilities in addition to our financial advisory services including underwriting, swap advisory, asset management, and continuing disclosure to name a few. With both full employee and independent retail brokerage advisory channels, I believe there is tremendous growth potential for that business as well. The pandemic has certainly presented unique challenges, but it hasn’t slowed our plans to continue growing our business. We will continue to focus on the clients first, and given the economic and financial impact of COVID, I believe the need for our assistance by clients is the greatest it has been in our firm’s history.

Q: In terms of municipals, talk a little about the balance at HilltopSecurities between banking and MA business?

A: Historically, HilltopSecurities has had more advisory business than underwriting, but we are not driving one vertical over another. We are focused on being the full-service solution provider to the public entity and engaging with them in the capacity that best serves their needs. We have invested significantly in our various business segments to assure we are offering the best solutions in the industry. We are now in a strong position as a comprehensive municipal-solutions provider and we are continuing to expand our client base across the United States. Clients today need more support and knowledgeable advice than ever on how to navigate through uncertain times. We’re in a position to help them, wherever it’s needed.

Q: How about other markets? Outside of municipals, how is HilltopSecurities investing in other fixed income markets, whether personnel, technology, ATS platforms?

A: We’re currently building out a new platform called Hilltop Matrix that will provide visibility into a broad range of market intelligence for all of our clients. We are also significantly expanding our fixed income trading and sales, our housing business, as well as our wealth management capabilities. We recently converted to a new leading technology system that will enhance our position in wealth management and as the third largest clearing firm in the country. Technology is certainly a focus of our vision for the future with a goal of keeping clients informed about market trends and the financial options available to them.

Q: Sticking with technology. Bond market technology is evolving quickly. How is HilltopSecurities adopting technology to increase market share across your fixed income businesses?

A: Technology is changing and evolving faster than at any time in my career and staying in front of the trends remains an ongoing focus. Transparency and quick access to information in an easily displayed format for the investor and the issuer is key to the ultimate value-add to the client. We have seen a rapid evolution of the equity business and research business in the past 10 years, and that technology has recently been entering the over-the-counter fixed income markets. It is a focus of the regulators and, ultimately, the transparency will help all of our clients make more informed financial decisions. There will always be a need for a personal relationship, but the more informed the client and the employee are about what is possible, the better the perspective and the decision outcome. That is also why diversity is so important in the success of our industry and why it is a key focus for me at HilltopSecurities. The ability to have a diverse set of people with varying opinions, from diverse backgrounds, viewing all the information, will ensure a better solution for our clients. HilltopSecurities is already one of the most diversified investment banks, and I intend to continue building upon that strength.

Q: You’ve recently announced new HilltopSecurities offices in key states including Minnesota and California. Are there plans for more physical expansion and talk a little about what’s driving the expansion.

A: We’re going where there is a need. We felt that an expanded presence in Minnesota and California could be helpful to public entities in those areas and that is what is driving that growth. We will continue to expand where we see opportunities across the United States.

Q: On a very specific regulatory issue - the SEC’s recent Temporary Conditional Exemption for municipal advisors – how, in your view, does this impact muni market structure, even if temporary as defined by the SEC?

A: I remain concerned when non-regulated entities without proper licenses are allowed to create and sell securities and transact what is traditionally a broker-dealer activity. In my view it jeopardizes the overall structure and integrity of the marketplace. Long-term, we’re going to have to watch very carefully how that non-broker-dealer originated collateral is traded and sold in the market and what assumptions are made regarding its origination. Ideally, that collateral would have an asterisk, noting that a non-broker dealer originated and created the security, so that the future investor knows to be cautious. However, I do understand the need for a response to the pandemic’s impacts on the market. As municipalities need more assistance beyond the federal lending programs, having more solutions is beneficial. I believe that is the intent of the temporary exemption order. However, with every change or rule, there are unintended consequences that need to be continuously monitored.

Q: Sticking with regulation, you are a member of the SEC’s FIMSAC. Can you talk a little about your experiences on FIMSAC and how the work of FIMSAC could impact market structure whether retail or institutional?
A: I’ve been very pleased and thoroughly enjoyed my experience and time on FIMSAC. It has been refreshing to have regulators listen and respond to industry leaders. They’ve clearly proven that they listen. Credit goes to the existing leaders at the SEC for soliciting unconditional feedback from the industry and creating an environment that allowed that.

Q: This has been great Brad so we thank you again for taking the time to talk with us today. Last question - what single issue - if you can name just one - keeps you up at night?

A: What keeps me up from a human capital perspective is the ability to ensure our staff is safe, healthy, and able to work remotely until we get through this current environment. My number one priority is to make sure everyone is taking care of themselves while we’re getting the job done for our clients. I’ve been very pleased with our success on that front over the past several months, but I also recognize that it has been very stressful for our employees and our clients. While COVID certainly has had a financial impact on everyone and will have a lasting impact on public finance entities, I remain very optimistic that the future is bright for our country.www.bdamerica.org

The Gap Between Now and Some Likeness of Normal LifeTom KozlikThird Wave Shutdowns to Have an Outsized Impact on State and Local Governments Without Additional Federal ReliefThere are two key questions still without answers even though we are about eight months into the COVID-19 crisis. Some thought results from the 2020 elections would help provide some answers. In reality, the political landscape and divided federal government now presents even more barriers than we saw between August and November. The two key questions today concern the exact same issues we needed more information about back in April.Severity and Length of the Third Wave of Shutdowns - The First QuestionThe first question is: How severe and or long will the next rash of shutdowns be? The third wave of the COVID-19 pandemic began just a few weeks ago and daily cases are expected to continue rising. Unfortunately, hospitalizations and deaths are also on the rise. It is possible these numbers could worsen as families gather during the November and December holidays. A new wave of state and local government containment policies are being instituted simultaneously. Whether the containment policies grow as severe and have a negative economic impact as we saw in the spring remains to be seen.

To track the results of the containment policies and consumer behavior we find it valuable to use the Mobility and Engagement Indices (MEI) published by the Federal Reserve Bank of Dallas. The Dallas Fed uses seven variables based on geolocation data collected from a sample of mobile devices to construct its MEI. There is a national index, and the data can be broken down by MSA and state-by-state. We have found this to be a worthwhile means to understand the economic impact of the steps being taken to contain the virus and to understand individual behavior spread across different areas.The Dallas Fed’s National MEI is Still Well Below Pre-COVID-19 Levels (as of Nov. 7, 2020)Source: Safegraph, Homebase, Federal Reserve Bank of Dallas, Federal Reserve Bank of New York, Lewis, Daniel J., Mertens, Karel, and Stock, James H., and HilltopSecurities.You can see the Dallas Fed’s National MEI is still well below pre-COVID-19 levels and there is the potential for this data to worsen as third-wave-related lockdowns become more severe. National messaging on COVID-19 has been rare. However, President-elect Joe Biden is making COVID-19 front and center for his incoming administration. We would expect more coronavirus-related communication after the January 2021 inauguration. Until then, we expect state and municipal leaders will be tackling this third wave on their own.The Fifth Phase of COVID-19 Federal Relief- Second QuestionThe second question is related to the potential for the fifth phase of COVID-19 relief from the U.S. federal government. And then, we are also eager to find out if there is going to be direct aid for state and local governments granted in a fifth phase. So far, the near-term indications coming out of Washington are not positive.

There has been a massive amount of COVID-19 related relief injected into the economy since March. By our count, we have seen $3.6 trillion spread over four phases of legislation. The largest was the third phase, which was the $2.7 trillion Coronavirus Aid, Relief, and Economic Security or (CARES) Act. But there was only $150 billion included in the CARES Act for state and local governments and that money could only be used for COVID-19 specific purposes.Another $127 billion of COVID-19 relief can be assumed allocated for the use of state and local governments, according to data published by the Committee for a Responsible Federal Budget, but those dollars were not considered flexible enough to be used for budget relief. There still has not been any unencumbered money allocated to state and local governments.The Federal Reserve Chair has repeatedly communicated that U.S. monetary policy will continue to be as accommodative as needed. At the same time, Fed Chair Jerome Powell has also reiterated the importance of another round of fiscal relief. It is not the first time advice from a Federal Reserve chair fell on deaf ears.

Former Fed chair Ben Bernanke regularly shared a similar criticism of Congress’ failure to provide more fiscal policy right up to the final days of his tenure. “Excessively tight near-term fiscal policies have likely been counterproductive,” former Fed chair Bernanke said in remarks before the American Economic Association in 2014.State and Local Government Job Losses, More Pain ExpectedThe state and local government response to the COVID-19 financial stresses illustrates the credits’ resiliency and the number of options available to them in order to manage through budget stress. A key strategy state and local governments have utilized in order to manage through budget uncertainty is by laying off workers. Headcount is a key, and often significant, state and local government expenditure. Now for some, layoffs are the only option remaining.State and Local Government Jobs Nearing April 2020 LowEconomic data released at the beginning of November showed nonfarm payrolls grew by 638k in October, a higher than consensus result. This was the sixth straight month of positive gains in nonfarm payrolls since the containment policies in response to COVID-19 gutted the U.S. labor market at the beginning of 2020. Many industries, even restaurants, and some service sectors, hardest hit by the spring and summer containment policies have seen consistent gains. Activity in the state and local government labor market has been quite different. State and local governments have only added back jobs in three of the last six months. In the last two months (September/October), state and local governments have shed a total of 317k positions.Municipal Employment Vulnerable to Near-Term Job CutsTotal state and local government job levels are dropping closer to the April 2020 lows with these most recent losses reported by the Bureau of Labor Statistics. Many state and local governments will be preparing mid-year budget adjustments that are likely to become real in the next few months. Indications have been building since the spring. The National League of Cities (NLC) warned of the potential for severe cuts in Essential Municipal Employees Vulnerable to Severe Cuts back in May. In a June survey of 1,100 municipalities, the NLC found 32% of cities will have to furlough or lay off employees and 65% of cities were being forced to delay or cancel infrastructure projects. We expect that additional state and local government job losses will mount without a very clear indication from the federal government that relief is on the way.Public Finance Downgrades to Outpace Upgrades, Probably for YearsPublic finance downgrades will likely continue to materialize, and just like after the Great Recession, we expect downgrades to outpace upgrades for some time. In our Aug. 13 report, Public Finance Downgrades to Outpace Upgrades, Probably for Years, we emphasized that after the Great Recession public finance downgrades outpaced upgrades between 2009 and 2014. We also stressed that the number of downgrades did not peak until 2012. This peak was years after the National Bureau of Economic Research reported the Great Recession officially ended in June 2009.

At the beginning of November, third-quarter 2020 public finance rating activity was tabulated and reported by Moody’s Investor Service, showing that while public finance rating downgrades (73) outpaced upgrades (72), it was not by much and it still seems the outright number of downgrades is lagging expectations. However, we expect that downgrades will pile up as credit deterioration mounts.73 Public Finance Downgrades Versus 72 Upgrades in 3Q20Source: Moody's and HilltopSecuritiesReason to be Optimistic- VaccinesThere are reasons to be optimistic. In the middle of November, news about COVID-19 vaccines continued to be released. At the beginning of the week of Nov. 9, studies noted that vaccines coming out of Pfizer and BioNTech were successfully preventing 90% of infections. The week of Nov 16 began with news of a Moderna vaccine that is reported as being 94% effective. This is good news, however realistically, they are not expected to be approved, manufactured, and distributed until well into next year. This graphic from the New York Times shows how the timeline is being compressed. Much is likely to occur between now and then.SummaryMuch has occurred since the COVID-19 crisis began. A record amount of U.S. monetary and fiscal policy has already been created and/or spent during this time. More fiscal accommodations are being sought after in order to bridge the gap between now and when vaccines are likely to be manufactured and distributed. We are watching closely to see what develops during space between now and some likeness of normal life.Disclosure:The paper/commentary was prepared by HilltopSecurities and is intended for informational purposes only. Information provided in this paper was obtained from sources that are believed to be reliable; however, accuracy and completeness are not guaranteed. The statements within constitute the views of HilltopSecurities as of the date of the report and may differ from the views of other divisions/departments of HilltopSecurities; in addition, the views are subject to change without notice.

Hilltop Securities Inc. is a registered broker-dealer, registered investment adviser, and municipal advisor firm that does not provide tax or legal advice. HTS are wholly owned subsidiaries of Hilltop Holdings, Inc. (NYSE: HTH) located at 1201 Elm Street, Suite 3500, Dallas, Texas 75270, (214) 859-1800, 833-4HILLTOP.

© 2020 Hilltop Securities Inc. | All rights reserved | MEMBER: NYSE/FINRA/SIPC | hilltopsecurities.comwww.bdamerica.org

Solving the Municipal Markets's Fundamental Credit Data ProblemTriet NguyenMunicipal bonds are a unique fixed-income asset class, arguably second only to Treasuries in terms of average credit quality, with the ability to satisfy any investor’s visceral opposition to paying taxes. Yet, they are also maddeningly difficult to manage from a credit research, trading, and portfolio management standpoint. Blame it on the sector’s historical lack of accurate fundamental credit reference data, itself a product of the sector’s “bespoke” nature. With the technology tools now available to the industry, isn’t it time we try to find a solution to this problem?Distinct regional markets with unique characteristicsWhat do we mean by the “bespoke” nature of the municipal sector? This refers to the fact that there is not only one but fifty distinct regional markets plus the territories (most notably Puerto Rico). Each has its own unique characteristics and tax exemption feature. Certain states offer double tax exemption (i.e., their bonds are exempt from state as well as federal taxation).

If you then layer on top of these markets the multiplicity of legal and security features available to any bond issuer within each state, you quickly end up with a mind-boggling number of potential credit combinations, each a “direct obligor” on its own.

A well-regarded municipal analyst recently noted that in the corporate sector, a company like General Motors (“GM”) would only issue GM bonds, not “Chevrolet” or “Cadillac” bonds. Yet in municipals, an “obligor” can be any of the following:

• The issuer itself, if the issuer is the party directly responsible for the repayment of the debt (e.g., the City of Chicago for City of Chicago G.O. bonds)
• The enterprise or business-activity fund which receives and holds the revenues pledged for debt service (e.g., City of Chicago Water Fund)
• A defined source of revenues pledged for debt service, in the case of Dedicated Revenue Bonds (e.g., “NYS Personal Income Tax”)
• The “lessee” in the case of a lease transaction involving an issuer, a lessor, and a lessee

To stay with the comparison to the corporate sector, also consider this: if you buy the bonds of Apple Corp., the so-called “obligor” the party responsible for debt service is Apple, plain and simple. Yet, a typical municipal bond issue may involve as many as three or more separate and distinct entities: an issuer, a nominal borrower, and often, another third party whose revenues are pledged to the repayment of the bonds.

For instance, if you buy bonds issued by the New York State Dormitory Authority (affectionately known as “NY Dorms”), you are probably not buying the Authority’s credit but another state entity’s (e.g., one of the State Universities) or a dedicated revenue stream (e.g., the State’s Personal Income Tax receipts).Current classification schemes fall shortBy DPC DATA’s estimate, there may be up to 40,000 distinct muni obligors, compared to about 5,000 or so in corporates. It can be a daunting task to get your arms around this large number of obligors. Imagine managing a portfolio of thousands of municipal credits, each with its own unique characteristics!

Ironically, the very complex nature of the municipal market highlights the importance of correctly identifying where your ultimate credit risk lies.

But aren’t there solutions to this problem already available, you ask?

Well, is the answer is Yes and No. Many vendors in the fixed income area have tried to come up with some sector classification scheme. Most of those are based, however, on “purpose” or “use-of-proceeds,” which are usually easier to identify and don’t require much credit analysis. Even then, the currently available data solutions still end up with categories with little analytical value, such as “Buildings” or “Facilities.” Furthermore, when in doubt, they usually revert to the ubiquitous “Miscellaneous” or “Other” category.A better classification schemeWhat the industry needs, we believe, is a comprehensive relational database linking every single bond issue to its correct “direct obligor”, at the individual cusip-9 level, based on a rigorous and consistent credit-driven methodology. Once identified, the “direct obligor” would be used to classify the bond issue into the correct sector/subsector. “Follow the money,” as they say.

This new classification scheme would allow market participants, both on the buy and sell sides, to correctly identify the source and nature of credit risk in their holdings and to aggregate such risk into meaningful sectors that share common risk drivers.

It wouldn’t require much of a stretch of the imagination to see how such a system would enhance the information flow and perhaps even improve liquidity in a market as heterogeneous as the municipal sector.

Truth be told, the municipal industry has been a notorious laggard when it comes to the adoption of technological innovations. Still, the current pandemic environment offers a unique opportunity to address a gaping hole in our reference data set. The uncertain fiscal environment facing most state and local issuers call for increased credit vigilance on the part of all market participants, from the institutional investor to the individual financial advisor.

With a potentially large portion of the workforce working from home for the foreseeable future, any workflow improvement through partial automation should yield immediate benefits. A trader working from home would not need to consult with his desk analyst just to find out the exact security she is about to bid on. Similarly, an automated bidding system can be built to handle large retail bid lists.

There has been much talk about Machine Learning and Artificial Intelligence applications of late, but such applications need a clean fundamental set of data as a starting point. The potential use cases for an accurate and comprehensive credit reference database are truly limited only by the imagination and creativity of market participants.

For more information about DPC DATA’s Obligor and Sector Mapping System, please visit DPCDATA.com or contact sales@dpcdata.com.www.bdamerica.org

What Have We Learned about Disclosure and Due Diligence from the Covid-19 Pandemic? Nixon PeabodyThe spring of 2020 represented probably one of the greatest disclosure and due diligence crises in the history of the municipal securities market as the chaos of the COVID-19 pandemic unfolded. In an instant, the financial and operating conditions of many municipal issuers across the country dramatically changed, maybe permanently. Suddenly, historical financial and operating information gave little insight into understanding how the pandemic would shape the financial and operating condition of municipal issuers. Nothing in the economic history of the United States could serve as a precedent for municipal issuers to understand the economic challenges created by the pandemic.

Meanwhile, investors were also forced to make rapid-fire investment decisions and, particularly in the early days of the pandemic, needed to make many of those decisions with virtually no information concerning how the pandemic had impacted many municipal issuers. Investors, like other financial stakeholders in state and local government, became desperate for whatever information they could obtain in order to provide some light into how to make good investment decisions. Worse still, in some places, there was the information in media articles and other public places, but much of that information appeared to be misleading or even in some instances wrong.

In an industry that, when in doubt, has always tended toward something of an aversion to disclosure when facing the unknown, municipal issuers across the country were plunged into confusing chaos with financial stakeholders including investors seemingly demanding to know information that the municipal issuer could not even possibly know. The confusion arose to the level where the Chair of the United States Securities and Exchange Commission (the “SEC”) and the Director of the Office of Municipal Securities took the extraordinary step of issuing a public statement 1 (the “Public Statement”) urging municipal issuers to provide investors with information concerning how the pandemic was impacting their finances and operations and what actions were being taken to address such impacts. The SEC even went so far as to provide comfort to municipal issuers that the SEC did not expect to second guess good faith efforts by municipal issuers to provide forward-looking information.

The reaction was also extraordinary. Municipal issuers published more voluntary disclosures than ever before. While some complained that many of the voluntary disclosures were general in nature, never before had so many municipal issuers made the effort to publish voluntary disclosure to inform investors concerning the impact of the pandemic. But in many instances, the voluntary disclosures were helpful to investors and often gave investors good information upon which to make investment decisions.
Lessons LearnedWhile the pandemic continues, much of the initial inability to provide any sense of how the pandemic impacted the economy has subsided, and municipal issuers seem to increasingly understand their forward-looking pictures. The dust has settled a little bit, but with COVID-19 cases once again increasing we may all be right in the think of difficult disclosure questions again. Accordingly, we think it is a good time to look back on the chaotic spring and summer of 2020 and try to distill some of the lessons learned about disclosure and due diligence to evaluate what we can carry forward into the future. Here is a list of some of the lessons we think we learned:

• Lesson #1: The first principles of the federal antifraud laws were more helpful than it may have appeared

As the pandemic unfolded, market participants increasingly sought more and more legal guidance concerning (1) should issuers provide voluntary disclosures, and (2) how can issuers provide meaningful disclosure concerning the impact of the pandemic when they themselves do not know the impact. Much more often than not, the answers to these questions were in the somewhat simple principles of the federal antifraud laws that helped market participants navigate these questions. Here are some examples:

• “Speaking to the market,” “total mix of information,” and “circumstances”

One of the common questions during the most volatile moments of the pandemic is whether a municipal issuer should provide a voluntary disclosure to investors describing how the pandemic was impacting the finances and operations of municipal issuers. Usually, that question was answered through some basic principles of the federal antifraud laws. In fact, presciently, the SEC’s Office of Municipal Securities issued a Staff Legal Bulletin (the “SLB”)2 about a month before the pandemic’s stay-at-home orders where the SEC advised the market concerning some of these basic principles. The SLB noted that all kinds of statements that are not specifically crafted for investors nevertheless form part of the “total mix of information” of an issuer that investors use to make investment decisions. As the SLB states:"Municipal issuers disclose current information about themselves in a variety of ways, including public announcements, press releases, interviews with media representatives, and discussions with groups whose members have a particular interest in their affairs. In addition, information about municipal issuers is collected by state and local governmental bodies and routinely made publicly available. Because, as the Commission has noted, access to “current and reliable information is uneven and inefficient” in the municipal securities market, these types of statements are “a principal source of significant, current information about the issuer of the security, and thus reasonably can be expected to reach investors and the trading markets.” The fact that they are not published for purposes of informing the securities markets does not alter the mandate that they not violate the antifraud provisions."Accordingly, the SLB advised issuers to consider policies and procedures to ensure that the total mix of information is not inaccurate or misleading, including public statements by issuers that may alter the total mix of information.

While the SLB only provided guidance concerning basic principles of the federal antifraud laws, it proved invaluable about a month after its publication when the impact of the pandemic developed. Suddenly, all sorts of public statements emerged in newspaper articles, board meetings, press releases, and similar communications. Oftentimes, an issuer’s finance department would learn about public statements concerning the financial impact to the issuer after reading about the statement in the media. There was a sudden, intense demand from all financial stakeholders of state and local government to understand how the pandemic was impacting all sorts of aspects of those governments and the media was flooded with a surge of statements that could alter the “total mix of information.” When this occurred, the legal answer to the disclosure concern came down to these basic principles of the federal antifraud laws: all of these statements had the potential of altering the “total mix of information” and thus could be subject to scrutiny under the federal antifraud laws, but under the SLB, other SEC statements and case law, the municipal issuer could control the circumstances of the frenetic pace of public statements by providing investors a meaningful voluntary disclosure that provided a pathway for investors to understand how the pandemic was shaping the financial and operating condition of the municipal issuer.

• “Material fact”

Confronted with the uncertainty of the pandemic, many market participants found themselves paralyzed by the lack of knowledge of what was actually going on in the economy and how their financial and operating condition was being shaped by the pandemic. Many market participants felt that they were required to tell investors what was going to happen or their opinion of what was going to happen when that in fact was not known and was impossible to know. But this is where once again the basics of the federal antifraud laws were more helpful than one would have guessed. In the focus on “material fact,” the federal antifraud laws never obligated market participants to communicate the information they did not and could not know or even their opinion of what would happen. Instead, the responsibility of market participants was to ensure that the “total mix of information” did not state a misstatement of a material fact or omit a material fact that would mislead investors. Thus, the disclosure exercise became one of identifying what the municipal issuer actually knew and could communicate to investors. In some instances, municipal issuers gathered data they had never gathered before because that data was known and could help investors, and the municipal issuer didn’t have any data it usually collected that was current and helpful.

Thus, one of the major lessons learned during the pandemic is that, for an industry that is so used to seeing disclosure as a form or a set of data that it usually provides, the only real way to help market participants as the chaos of the pandemic unfolded was to return to the basics and the first principles of the federal antifraud laws and evaluate and disclose the facts under those principles. While the typical approaches and forms that we use in our disclosure proved largely unhelpful to address that unfolding chaos, the first principles of the federal antifraud laws for the most part did provide the necessary guidance.

• Lesson #2: Sensitivity to the informational needs of investors clears up a lot of legal confusion.

At the outset of the pandemic, one of the most common misimpressions among market participants was that providing disclosure concerning what was known about the impact of the pandemic could be a risky legal step to take. The impact to many investors of the early paralysis in disclosure was significant, as some investors were forced to make investment decisions without any benefit of information from the municipal issuer and, worse, in some instances with misleading information in the media. As the Public Statement indicated, market participants who appreciated these informational needs of investors and made good faith, reasonable efforts to provide information that would meet those needs were backed up by both the SEC and the federal antifraud laws, as well as strongly supported by the investment community. Accordingly, one of the best lessons from this year is that when investors have a clear need for information in order to make investment decisions, being sensitive to that need and providing information in a good faith and responsible fashion will take care of most if not all of the legal concerns at stake. In fact, given the potential for so many misleading statements in the media, not providing such information to investors could be the riskier approach.

• Lesson #3: Projections can be the safest way to disclose unknown impacts

One of the key characteristics of dealing with disclosure during this year has been that, in seemingly an instant, historical financial information of municipal issuers became either a lot less relevant or in some instances almost completely irrelevant to understanding the financial condition of the municipal issuer. In this environment, investors were desperate to obtain any facts or information that could shed light on the forward-looking condition of the municipal issuer. As the SEC stated in the Public Statement, “We observe that, in today’s markets, the typical practice of providing historic financial information in the form of providing historic financial information in the form of an annual information filing or similar disclosure may not enable investors to make informed assessments of the municipal issuer’s current and expected future financial condition.” Accordingly, municipal issuers suddenly found themselves trying to assist investors in understanding the forward-looking financial picture while in many cases never having provided forward-looking information to the market before. Many municipal issuers had historically only provided historical financial information, as given the nature of their finances, so that investors were able to garner enough of a picture of the credit to make informed investment decisions.

Trying to make this sudden cultural shift in the municipal securities market was one of the principal purposes of the Public Statement. As the SEC stated in the Public Statement, “We also encourage municipal issuers to provide investors with forward-looking information regarding the potential future impact of COVID-19 on their financial and operating conditions.” The SEC also noted the potential concerns for legal liability and stated that municipal issuers should accompany disclosures with “meaningful cautionary language” addressing the limitations of what the municipal issuer knew and could disclose. In addition, the SEC took the extraordinary step of stating that, “We would not expect good faith attempts to provide appropriately framed current and/or forward-looking information to be second-guessed by the SEC.”

In this environment, and aided by the Public Statement, many issuers made a good faith effort at providing financial projections as a means of explaining how the pandemic was shaping its forward-looking condition, and found that giving investors financial projections provided the municipal issuer more comfort that the disclosures were more complete and accurate given the circumstances. For example, in some instances, the municipal issuer decided that its disclosure to investors would be in the form of a financial scenario rather than traditional financial projections. That is, the municipal issuer would provide to the market a projection of its financial results based on various assumptions about the pandemic and economic recovery but while doing so being clear that the municipal issuer could not know the actual impact of COVID-19 or when the economy would recover. This way, investors could gauge how the shutdown of the economy could play out with the particular municipal issuer but the municipal issuer was not overstating what it knew. In the end, these financial scenarios served as a road map for municipal issuers to explain what they knew and what they did not know. Those scenarios needed to be well explained, all material assumptions disclosed, and clear warnings included concerning the limitations of the municipal issuer’s knowledge. But with the appropriate accompanying disclosures, the financial scenarios allowed the municipal issuers to clearly explain what they knew and what they did not know and proved in many places to be the most comfortable way for municipal issuers to explain what was happening.

• Lesson #4: Investment decisions are not that different from management decisions and that focus usually provides a huge source of both the disclosure and due diligence.

One of the best ways to understand what information municipal issuers could disclose to investors was to focus on management decisions of the municipal issuer and what management was considering when making those decisions. For example, most municipal issuers made significant financial decisions in the weeks following the emergence of the pandemic and in making those decisions were considering various financial scenarios to ensure that its decisions were informed. Oftentimes, all that a voluntary disclosure needed to do was to disclose those matters to investors, which meant that the municipal issuer disclosed the financial projections or scenarios that management was evaluating, with appropriate cautionary language and explanation; other financial information that management was considering, such as liquidity and the potential for state and federal aid; and an explanation of the decisions management had made or was likely to make. That is, in the end, management decisions and investment decisions are not all that different, and when disclosure to investors made an effort to provide investors insight into what management was seeing, evaluating, and deciding, the disclosure provided investors with good information upon which to make investment decisions.

• Lesson #5: Don’t assume that the officer or department you are talking to knows all that the municipal issuer knows.

One of the unique aspects of the impact of the pandemic on municipal issuers is how financial and operating information was communicated to the media and other sources before that information was disseminated throughout the municipal issuer. In some instances, a financial officer was under the impression that the pandemic’s impact was totally unknown only to find out that another officer of the municipal issuer had communicated to the media detailed forward-looking information concerning the impact. Further, in some instances, a financial officer of a municipal issuer would read a statement made by another officer, which had been made without the financial officer’s knowledge, in the media about an assessment of the impact of the pandemic on the financial condition of the municipal issuer, which the financial officer knew to be either wrong or misleading. The pandemic offered another reminder that state and local governments operate within bureaucratic silos and what one department believes is the best information or the only statement of the government may not be complete or even correct. As a part of underwriter due diligence, it became important not just to ask the right questions but to make sure that all of the responsible departments provided answers to the questions to make sure that the answers were fully representative of what the municipal issuer as a whole knew.

• Lesson #6: Don’t forget to look at the issuer’s website and media articles.

Given the chaos of the weeks following the shutdown of the economy, it was surprising how often, innocently enough, what representatives of the municipal issuer stated that they knew did not match what was on the municipal issuer’s website or media reports. For example, the finance department of a municipal issuer may have stated that they have no ability to know or assess the near-term financial results, only to discover that a detailed projection of the financial results of the municipal issuer was included in a board package for board consideration. Also, in some instances, a representative of a municipal issuer similarly believed that the financial impact of the pandemic was unknown, only to discover multiple public statements by other representatives of the municipal issuer describing detailed impacts. The pandemic served the valuable lesson that, when performing due diligence, underwriters should not just rely on answers from representatives of the municipal issuers. Many times those answers can be to the best of the knowledge of those representatives, but may not actually be complete. Reviews of the website of the municipal issuer and media articles remain an important check to make sure that better information is not publicly available.Keeping the “Lessons Learned” Going
If we look back, it is pretty amazing the new ground that has been plowed: (1) new forms of disclosure have been created that were adapted to the unique demands of the pandemic, (2) more municipal issuers than ever published voluntary disclosures, and (3) municipal issuers became more accustomed to providing projections and other forward-looking information. If the pandemic worsens over the next few months we may need these lessons pretty quickly. Regardless, though, the pandemic can prove long-term to be a strong learning experience to address disclosure on an ongoing basis but also as a template for how to deal with future economic crises.

1. https://www.sec.gov/news/public-statement/statement-clayton-olsen-2020-05-04
2. https://www.sec.gov/municipal/application-antifraud-provisions-staff-legal-bulletin-21

www.bdamerica.org

22 Factors for the Muni Market to consider as we approach 2021. Crosscurrents abound.George FriedlanderIntroduction.Under normal times with normal conditions, it would not be difficult to provide a market outlook for an upcoming year by late November/Early December. It should come as a surprise to no-one that this year is different for a variety of reasons: The ongoing pandemic and ongoing economic implications as vaccines emerge, the impending shift to an administration with a vastly different set of policies and goals, and a host of other issues. It is very likely that a significant number of these issues are going to become permanently transformative, including a) the need to prepare responses to climate change; b) the desire of the incoming Administration to reverse tax policies of the prior one; c)Federal financial responses to the Pandemic; and d) behavioral shifts that will affect cities and their economics and demographics, and so on. In addition, there are widespread uncertainties, such as the need for pandemic relief that may not be matched by successful legislation.

Consequently, there is vastly more going on, in our view, than can be adequately covered in a single article. Our goal here is to lay out a large number of the key issues facing our economy, state and local governments, and the municipal bond sector that can lead to more detailed analysis down the road, particularly as the pictures for the pandemic and for politics become clearer. We have divided these issues into 20 brief sections, with a clear need for expansion and follow-up as a clearer picture emerges.
Before starting our list, however, we note the importance of the upcoming pair of Georgia Senate races that will determine the fate of a significant number of the federal policy issues now on the table.1. The transition back to a focus on vast issues that will affect state and local governments in the post-election, post-pandemic economy. Over the course of 2020, so much energy and influence have been spent on the Pandemic and the Presidential Election, that it seems to us that other key issues affecting state and local governments got obscured—including responses to climate change, methods for funding (not financing) infrastructure, and the impending overlay of vast technological changes that will affect workers, states, cities and regional economies.

2. Politics still matter, because they will frame the shape of policy actions that affect state and local governments. There is so much to be discussed here, and we will only make a brief start. On a large host of issues, it will matter whether Biden gets a de facto majority in the Senate, via two wins in the January 5 Georgia races. However, with a 50-50 balance where Vice President Harris breaks the tie, there is much on the Biden agenda that will remain difficult, but not impossible. These may include, among many other things: a) a substantial pandemic relief package; b) sizeable Federal spending on infrastructure in the face of a huge Federal deficit, and c) importantly, desired increases in the tax rate on high-income individuals and corporations. As the NY Times noted on November 11:“Which party controls the Senate will largely dictate how ambitious President-elect Joe Biden can get on taxes, health care, climate change, and other policy priorities."

“If the Democrats obtain the two Georgia seats and a de facto majority in the Senate, it seems highly likely that work toward higher corporate tax rates (with fewer loopholes) and a more progressive tax code will begin in earnest, hopefully, to be enacted through Reconciliation, which only requires a simple majority. Democratic success in that area would most likely mean significantly stronger demand for munis, including a corporate tax rate around 28% that would draw more demand from banks and high net worth individuals in particular. Indeed, it could lead to a fundamental restructuring of the demand side of the muni market.”3) Timing of distribution of a vaccine, and breadth of such distribution, will be key and will affect the length of time until the economy rebounds. Clearly, much of the attention in 2021 on subjects that affect state and local governments will be related to a number of factors connected to vaccine approvals, successes, distributions, and willingness by individuals to take such a vaccine. We are hopeful that, given the dire consequences of Covid 19, most Americans will come around to the idea of getting the needed one or two vaccines, but in this political climate, it remains difficult to tell. It is also too early to tell: a) when the distribution of an approved vaccine will commence, b) how long it will take for such a vaccine to begin to provide “herd immunity,” c) how distribution will be prioritized, and d) how quickly it will begin to permit strong reopening of currently ravaged economic sectors. All kinds of uncertainties remain: how long will a vaccine be effective? Should individuals who previously got Covid to be included? And on, and on and on.

4) Ongoing pandemic-related economic worries will weigh heavily. Types of economic damage include unemployment and lower-income housing and economic issues (eviction, foreclosure, nutrition, education). As the Economic Policy Institute has noted:“Another 1.1 million people applied for unemployment insurance (UI) benefits last week, including 742,000 people who applied for regular state UI and 320,000 who applied for Pandemic Unemployment Assistance (PUA). The 1.1 million who applied for UI last week was an increase of 55,000 from the prior week’s figures. Last week was the 35th straight week total initial claims were greater than the worst week of the Great Recession. (If that comparison is restricted to regular state claims—because we didn’t have PUA in the Great Recession—initial claims last week were still 3.3 times where they were a year ago.) Most states provide 26 weeks of regular benefits, but this crisis has gone on much longer than that. That means many workers are exhausting their regular state UI benefits. In the most recent data, continuing claims for regular state UI dropped by 429,000, from 6.8 million to 6.4 million. For now, after an individual exhausts regular state benefits, they can move on to Pandemic Emergency Unemployment Compensation (PEUC), which is an additional 13 weeks of regular state UI. However, PEUC is set to expire on December 26 (as is PUA).”Meanwhile, of course, despite the optimistic outlook for vaccines, the breadth and depth of the Pandemic-related economic decline remain a key unknown, with a variety of risks for state and local governments and their credits.

5) Ongoing state and local governmental priorities in finance/tax law—including renewed access to advanced refundings, increases in the maximum size of bank qualified bonds, and the potential renewed use of direct pay bonds—i.e., what was called Build America Bonds back in 2009-10, could be a help. In the meantime, we are much less concerned about the potential sunset of the Fed Municipal Liquidity Facility, as recently discussed in The Bond Buyer:“Issuers will lose a financial, if not psychological, backstop from the Federal Reserve at the end of the year and some participants fear the municipal market will become more fragile, less resilient, and more prone to shocks amid another wave of coronavirus cases. Following Treasury Secretary Steve Mnuchin's move on Thursday telling the Fed to sunset emergency lending facilities created in response to the coronavirus — Thursday including the Federal Reserve’s Municipal Liquidity Facility — the news struck some municipal stakeholders as poorly timed and made them wary of the muni market's future.”In our view, the MLF has played an extremely limited role in providing liquidity for state and local credits, that appears to be much more psychological than actual, UNLESS, state and local credits become severely damaged by the Pandemic. In the absence of such a crisis, there appears to be ample liquidity for the vast majority of state and local credits.

6) Sectoral and regional risks to credits from the pandemic remain high for a number of sectors, including airports, tourism-related activities, universities, extended care facilities, charter schools, and more generally, local governments with weakened economic activity resulting from the virus. We continue to anticipate sectoral and geographic credit pressures, including a number related to structural behavioral changes, such as ongoing increases in work-from-home activities and reduced commercial travel for business-related activities. From S&P Global:“While credit conditions are largely favorable for many borrowers, pockets of risk are rising—particularly for U.S. state and local governments, whose tumbling revenues are adding to budget pressures. Risks around commercial real estate, too, are growing…Moreover, if Republicans and Democrats continue to split power in Washington, the chance for another round of sweeping fiscal stimulus may disappear.”Although this comment was made in a report pre-election, precious little has occurred to change the view of a) worsening economic conditions related to the Pandemic, and b) the urgent need for a Federal stimulus package.

7) Pressures on healthcare abound. Given the vast and growing magnitude of the incidence of virus illness, we remain concerned as to how much pressure on hospitals there will be, and how long it will last. There are issues related to both cost and staffing. As The Guardian noted on November 19, “US hospitals face an influx of patients and staffing shortages amid worsening pandemic. More than 76,000 Americans are hospitalized, the highest number of the entire coronavirus pandemic, as healthcare workers battle severe burnout.”

8) The need for a pandemic relief package is urgent and may go unmet. At this point, it seems possible that the new Administration will be able to obtain an agreement to no more than a relatively modest relief package, whether they win the two Georgia Senate seats. Even with that outcome and the resultant slim majority in the Senate, the filibuster would remain in place, and given that, the likelihood of getting McConnell and his Republican Teammates to agree to a substantial relief package appear slim. We are also hearing about considerable disinformation floating around the halls of Congress regarding just how much pressure state and local budgets will be under once the benefits $2.2 trillion CARES Act singed in March begin to sunset. In terms of implications for state and local governments and for former recipients of CARES, we remain extremely concerned about budgetary implications for state budgets and spending requirements. As we note from an Economic Policy Institute report on November 12, “With unemployment benefits for millions of workers set to expire in December, Senate Republicans must stop blocking aid.” As the report notes, “Most states provide 26 weeks of regular benefits, but this crisis has gone on much longer than that. That means many workers are exhausting their regular state UI benefits. In the most recent data, continuing claims for regular state UI dropped by 436,000, from 7.2 million to 6.8 million.”

9) The housing sector is strongly bifurcated. In a pattern that would be unlikely in a “normal” economic environment, various components of the housing sector experience widely divergent patterns. Home prices in some parts of the country—especially suburbs—are quite strong, as buyers seek work-from-home opportunities and reduced needs to commute into inner cities. Meanwhile, lower-income families and individuals face risks related to evictions and foreclosures related to the pandemic, that seem unlikely to improve until a stimulus package is enacted, and until the economy begins to rebound sharply—after broad-based distribution of a vaccine, for example.

10) The desire for a more progressive tax code among Democratic Lawmakers will likely be thwarted for now, and that will affect the demand curve for munis. Even if Democrats win in Georgia, Republicans in the Senate will be well-positioned to prevent any increases on the corporate tax rate from the current 21 percent or implement a more progressive tax structure for wealthy individuals.

11) The outlook for interest rates seems relatively neutral. To be sure, Treasury yields bounced fairly sharply for a very brief period after the election, before receding once again. Nevertheless, with the US and global economy damaged by the coronavirus, it seems unlikely that inflationary pressures will increase any time soon. This would particularly be the case if there is not a significant COVID relief package, as the Fed does what it can to maintain a stimulative monetary policy in the absence of sufficient fiscal support. Meanwhile, the high-grade muni market has been significantly stronger over the past month than Treasuries. According to IHS, 5-year high-grade muni yields as a percentage of Treasury yields have dropped from 80 percent of Treasuries to a remarkably low 55 percent of Treasuries. 10-year high-grades have moved from 114 percent of Treasuries to 83 percent. 30-year high-grades have moved from 105 percent of Treasury yields to 92 percent. The key patterns appear to be ongoing strong demand from bond funds resulting from painfully low short-term yields in all sectors. 6-month Treasury yields started 2020 at 1.57 percent. Currently, with the Fed providing about as much stimulus as they can, 6-month Treasury yields are at a remarkably low 0.10 percent. 2-year Treasury yields dropped from 1.58 percent to 0.16 percent. The utter lack of yields all along the short-end of the curve is unlikely to go away, and that has driven individual investors out along the curve, in munis in particular.

12) Fund managers face challenges from credit change, and that will affect demand. As a number of municipal sectors contain credits that remain damaged by the pandemic, municipal bond fund managers will face considerable challenges in maintaining solid credit quality in large muni fund portfolios. While Refinitiv Lipper reported that Municipal Bond net inflows of $0.770 billion for the week ended November 18, we remain concerned that flows could weaken significantly if economic pressures on municipal credits lead to substantial downgrades and/or bona fide credit risk. We would not be surprised to see fund flows remain “choppy” until the outlook for a Coronavirus relief package becomes clearer.

13) The federal role in Infrastructure remains uncertain. While we recognize that the Biden Administration will be coming into office with a strong desire to enhance infrastructure spending, there remains a vast gap between funding and financing in any federal role. As is noted in The Washington Post:“Next year may also be when we finally live through an actual Infrastructure Week. Biden will not get his $2.4 trillion energy and infrastructure plan through a McConnell Senate, but a much more modest highway bill unanimously cleared the Environment and Public Works Committee over the summer. And there’s a deal to be had on energy innovation, a package that acknowledges the country still needs an all-of-the-above energy strategy but also spurs more investment in renewables.”The case for additional spending on infrastructure remains extremely strong. As Beth Ann Bovino, the Chief US Economist at S&P Global notes:“Because of the coronavirus pandemic, the longest U.S. economic expansion in U.S. history has abruptly ended: We forecast that U.S. economic activity will shrink by 11.8% ($566 billion) in real terms, peak to trough. The well over 30 million jobs lost at the trough will wipe out all the jobs created in 23 or more years. Economic damage will be three times greater than the Great Recession, in one-third of the time."

“A $2.1 trillion boost of public infrastructure spending over a 10-year period, to the levels (relative to GDP) of the mid-20th century, could add as much as $5.7 trillion to the U.S. over the next decade, creating 2.3 million jobs by 2024 as the work is being completed. The additional 0.3% boost to productivity per year that it generates will lead to a net 713,000 more jobs on the books by 2029.”And yet, important questions remain as to how such a boost in infrastructure spending would be approved in a US budget with an already-vast deficit. We are confident that discussions regarding infrastructure spending will be a serious topic during 2021. However, major questions remain as to how to get infrastructure projects FUNDED, as opposed to FINANCED. There is widespread discussion of ways to finance additional projects, such as to use pension assets as a source of loans. HOWEVER, getting loans or debt financing is not the problem; the key problem is for state and local governments to identify sufficient revenue sources that they can pledge for debt service on such borrowing. At this point, we are not at all optimistic that the compelling case for additional infrastructure projects will be matched with necessary revenue sources for repayment, especially given the weakening of the US and state/local economies as a result of the pandemic.

14) There is an impending and multifaceted need for funding related to climate change. Even as we focus on a massive need for traditional infrastructure spending, we cannot ignore impending needs for spending related to climate change, in a variety of ways. These include a) spending for a reduction in our carbon footprint through a transition to non-carbon sources of energy; b) protection of local communities from the ravages of weather-related patterns and events, including hurricanes, floods, droughts, and forest fires; c) protection from the encroachment of higher ocean/sea levels; and d) migrations of populations away from locations with the greatest potential for ravages from weather and climate events. This funding will be costly, of course, and in a sense will overlap with and potentially compete with the demand for funding for traditional infrastructure projects.

15) Fund managers face challenges from credit change and that will affect demand. As a number of municipal sectors contain credits that remain damaged by the pandemic, municipal bond fund managers will face considerable challenges in maintaining solid credit quality in large muni fund portfolios. While Refinitiv Lipper reported that Municipal Bond net inflows of $0.770 billion for the week ended 11/18, we remain concerned that flows could weaken significantly if economic pressures on municipal credits lead to substantial downgrades and/or bona fide credit risk. We would not be surprised to see fund flows remain “choppy” until the outlook for a coronavirus relief package remains clearer.

16) There are significant implications of the rapid growth of technological change—where economic activity is located, and what it looks like. This includes the transition to electric vehicles from gas-powered vehicles, and a host of other changes in our technological “footprint,” technology-enabled infrastructure platforms and projects. Clearly, technological advancements are accelerating transformations in traditional infrastructure, creating opportunities for governments that are positioned to benefit from the deployment of new technologies. In addition, technological change is leading to “clustering” of technology-based activities in some urban centers, while leaving others behind.

17) The need for public-private partnerships is growing. As we move toward more technology-based activities at the state and local level, it seems inevitable that governments and technology companies will need to pair up in order to optimize the use of new technologies and keep pace as new technologies are implemented. Quite simply, most state and local governments will strongly need the expertise of the private sector. There will be ongoing challenges in keeping local governments free of “technological capture,” but strong relationships between governments, engineering firms, technology-based design firms, and the like appear to be imminent, and they need to be permitted under Federal law in ways that do not interfere with the use of tax-exempt funding.

18) The pandemic and related changes in commuter activity will put pressure on cities. We remain concerned that a number of major cities will remain under economic and financial pressures as the pandemic ultimately peaks and then subsides. Concerns are multifaceted, including a) increased, continual use of work-at-home activities that affect economic activities in downtown spaces, b) reduced tourism that may take as long as 5 years to recover, according to some estimates, c) reduced use of commuter vehicles if work-at-home strategies become increasingly prevalent, and d) pressures on low-income housing, particularly if a substantial federal pandemic relief package is not enacted.

19) Challenges for state and local governments simply related to impending, rapid transitions are ongoing. The move toward electric and automated cars and trucks and many other transitions may occur more rapidly than most states and cities can handle comfortably.

20) We will see vast, rapid changes in the outlook for labor, both positive and negative, as we move toward technological advances and contend with climate change.

21) Challenges like pollution control, conservation, and education will continue to weigh on states and localities. The costs involved in all of these policy reversals will be large, at both the federal and state/local level.

22) Finally, there are overlaps in spending needs between municipal finance-related issues and social justice-related issues. We have little doubt that a variety of social justice issues are going to receive an important boost under the Biden administration, including improvements to healthcare and education and reduction in pollution-related damage to minority populations, starting with African Americans. A key concern for the municipal sector is simply this: these transformations are both urgent and costly. In an environment of extremely scarce federal monies, they may very well create competition for funds with traditional state and local funding requirements. And, all of this will overlap with vast needs for spending related to climate change. How this all tracks over the initial year of the Biden/Harris Administration will be an important consideration for state and local finance that we have never experienced before.

The bottom line is that changes are coming quickly in ways that will be both positive and negative for state and local credits. The above only scratches the surface; it is meant to be no more than a “tickle file” of transitions that are likely to commence as a new Administration comes into power and as we hopefully obtain access to highly effective vaccines for the Coronavirus that will permit a rebound in economic activity. Meanwhile, the costs associated with these impending issues are going to be vast, whether for infrastructure, climate change, or urban redesign. A number of leading technologists view impending transitions as being exponential changes, that will create all sorts of new challenges for state and local governments.
There is some good news: the potential positive impact of “exponential change.” We tend to track closely growing discussions of exponential change that are increasingly becoming part of the discussion about economic responses, post-Pandemic. We have already seen one greatly important example of exponential change: the incredibly rapid creation of Coronavirus vaccines in 9 months or so.

From a recent article in “Information Age:”“Exponential change. This was the subject Peter Diamandis, founder and executive chairman of XPRIZE Foundation, introduced to the audience during his keynote at PTC’s LiveWorx 19.
His rhetoric was surprisingly optimistic, given all the negatives around politics, climate change, war, and famine that regularly dominates headlines, as he said:

‘The future is better than we think despite all the negative news. Everyone is empowered to change the future and the future is much faster than we think. These are the two truths.’

“Computational power between now and today is ascending in a smooth curve: exponential should be a straight line on this graph, so the fact there is a curve shows it is accelerating.” Source: The power and implications of exponential change, by Peter Diamandis.
Faster and cheaper computers and technologies will lead to new business models and ecosystems.

The convergence of these technologies will, without doubt, disrupt every single industry — they’ll be “unrecognizable” a decade from now.So, now we get to the good news/bad news aspect of these patterns. On the positive side, they will help us and the world respond in a post-pandemic environment, in ways that implement new technologies to a growing degree and offset some of the damage done by the Pandemic.

On the potentially negative side, it is our view that state and local governments will be strongly challenged to respond to these rapid changes, which will generate all sorts of changes in the shape of industry and labor, and if indeed, both industry and labor shift in ways that generate state and regional pressures, it will be difficult for state and local governments to respond in ways that support their traditional roles. We mention this here, in part because we anticipate that these patterns will become more visible as soon as mid-2021, assuming that we begin moving back toward normal as vaccines become broadly distributed. All we can say, at this point, is “stay tuned.”www.bdamerica.org

Electronic Taxable Bond Trading: Choose WiselyDavid ParkerIntroduction.The conventional wisdom around electronic corporate bond trading is that it is a “Good Thing,” but many participants in the market might argue that it would be more accurate to call it an “inevitable thing” -- and not automatically good in all forms. Its increasing ubiquity means an increase in market-wide information efficiency and being able to trade more with less work (and importantly, from any location). But at the level of an individual institution, many feel that electronic trading also comes with significant added costs, complexity, risks, and strategic pitfalls. To avoid a market structure that is overly expensive and restrictive to its own growth, market participants need to be mindful of these issues and very deliberate around which models they support and where they focus their activity.

In the U.S. corporate bond market, what was a slow and steady increase in electronic trading over the past decade has accelerated markedly over the past two years. Volumes traded and processed electronically have grown sharply and together constitute close to 50% of the volume traded. Almost every major market player in corporate bonds is now using electronic trading as a fundamental part of their business, and the largest asset managers, in particular, have refocused their trading desks to be more electronic. This trend of course also got a huge boost from the changes brought about by COVID-19.

Although benefits abound, there is a fair amount of subtlety around whether e-trading helps or hurts a specific individual institution or market. The benefits outweigh the negatives, but for both the sell-side and buy-side, critically thinking about how different venues operate and directing business accordingly will lead to a much better experience and profitability in the long run.

Compared to voice-based OTC trading, electronic trading allows a broker-dealer or “sell-side” firm to attain huge leverage around the distribution of prices/axes, access to clients, and access to information. Once integrated with electronic venues, that dealer is able to provide and receive liquidity and information from all of the venue’s clients (in all to all venues) or its own clients (in bilateral venues) while using a medium and workflow that the clients prefer. This can be particularly valuable when venues are able to deliver data and facilitate trading across international boundaries and in multiple products and time zones.

However, many in the market feel that the financial cost of a seat at the electronic table can be very steep, both in terms of upfront cost to the venue and the commissions applied by venues to each trade. Some venues charge access fees upfront, in addition to volume-based commissions through which the more you trade, the more you pay. Fees are not charged in the non-electronic model. All in all, some participants feel that the minimum financial cost to start participating in electronic trading via some venues can be quite prohibitive, and hidden costs included in trade prices are a tax on participants’ performance. And in a fragmented market, for dealers, there may be multiple such venues to pay and multiple electronic workflows to support. Traders and management are now more than ever highly aware of their own costs as well as those imposed on their trading partners by venues, and attempt to direct business appropriately.

The soft costs of trading electronically can be significant as well in the current market model. The OTC voice credit markets traditionally operate on the basis of a bilateral relationship between dealer and client, with information and risk flowing back and forth over long periods of time. The information exchanged between the two parties is kept confidential between them. These relationships are built over time across multiple repeated interactions, and for better or worse are highly specific to the personalities on both sides.

When a venue serves as a middleman in the previously direct dealer-to-client relationship, dealers have shared that they can struggle to maintain their identity and rapport with clients. There may be a loss of market color and unique insights, particularly when clients are driven to request liquidity from many dealers at once “in competition.” Relationships can deteriorate and the venue itself can become more of a focus over time and begin to serve as an arbiter of the dealer-client relationship. In some cases, information about client requests and activity may become the property of the venue and no longer be exclusive to the parties to the inquiry or trade.
None of these potential negatives of cost, confidentiality, and erosion of the bilateral relationship outweigh the massive positive benefits of electronic trading. They are, however, important considerations that we hear from clients when discussing which venues to partner and/or grow with and what market-wide changes to advocate for.

Traders and management should be particularly mindful of additional costs, whether explicit or soft, that may arise from replacing significant “voice” volume with electronic trades and whether there are less expensive ways to achieve the same goals. It can also make sense to evaluate partners based on breadth of product offering, diversity of client networks, and ability to deliver connection synergies in a cost-effective manner. As venues continue to emerge, proliferate, and re-merge, market forces will dictate the long-term winners and losers – and those market forces are comprised of the collective actions of every firm trading corporate bonds today. The choices made by market participants today will shape the market structure we have in the future, and everyone can work to ensure we are in a better, more efficient place with more and cheaper liquidity than ever before.

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