Muni bonds lose favour
The amount of loans collateralised by municipal bonds in the Markit US dollar tri-party repo dataset has fallen by 20% since the start of the year.
The margin needed to fund municipal bonds has jumped by two thirds since January.
Municipal tri-party bonds in the Markit USD tri-party repo dataset have fallen from $9bn at the start of the year to settle at a new recent low of $6.7bn in the closing days of September.
Further examplifying the falling popularity of municipal bonds in wholesale funding markets, the proportion of loans against municipal bond collateral in the dataset has fallen from 1.1% at the start of the year to 0.8% currently.
The daily amount of transactions has also fallen significantly over the last nine months, falling from $4bn to just over $3bn.
The margin needed to fund municipal bonds has jumped by two thirds since January.
Finance companies are retooling their balance sheets to adhere to new capital adequacy rules which favour liquid transparent assets. Any asset which doesn’t get the high quality liquid asset (HQLA) stamp issued by regulators stands to lose favour.
"This could raise the cost of capital of companies which rely on these less liquid types of assets to raise capital," said Simon Colvin, research analyst at Markit.
"One asset class which is currently set to stand on the wrong side of the HQLA divide is Municipal bonds, which stand to be labelled non-HQLA when the new Fed liquidity coverage ratio rule takes effect at the start of next year. Although Fed board member, Daniel Tarullo, said in a recent speech that the Fed was looking into steps to make some municipal and state bond issuances HQLA compliant, no details have been released yet."
Municipal tri-party bonds in the Markit USD tri-party repo dataset have fallen from $9bn at the start of the year to settle at a new recent low of $6.7bn in the closing days of September.
Further examplifying the falling popularity of municipal bonds in wholesale funding markets, the proportion of loans against municipal bond collateral in the dataset has fallen from 1.1% at the start of the year to 0.8% currently.
The daily amount of transactions has also fallen significantly over the last nine months, falling from $4bn to just over $3bn.
Municipal bonds have also seen the amount of over-collateralisation required in order to raise cash jump steadily over the last few months.
At the start of the year, the weighted average haircut for municipal bond collateral, the amount of extra collateral required to be posted against a loan, was 1.5%. That number has since climbed to 2.5%.
"This requirement from cash lenders to hold extra collateral highlights the increased weakness of the asset class among participants of the wholesale funding market," said Colvin.
The rest of the tri-party funding universe has proven more buoyant in recent months, with the aggregate value of loans in the Markit USD tri-party repo dataset climbing by 7.6% since the start of the year to $907.4bn in the last nine months.
This large increase was mostly driven by US treasuries (excluding strips) whose aggregate balance has jumped to $520bn, 17% more than at the start of January.
"Although the amount of overall Muni bonds funded by through tri-party repo is low both in absolute and relative terms, the decreased appetite for municipal loans in the tri-party repo world and the increased risk perception in the wake of their exclusion form the HQLA list suggests that holders of these assets would face a tougher time financing these assets in the repo market," said Colvin.
"This requirement from cash lenders to hold extra collateral highlights the increased weakness of the asset class among participants of the wholesale funding market," said Colvin.
The rest of the tri-party funding universe has proven more buoyant in recent months, with the aggregate value of loans in the Markit USD tri-party repo dataset climbing by 7.6% since the start of the year to $907.4bn in the last nine months.
This large increase was mostly driven by US treasuries (excluding strips) whose aggregate balance has jumped to $520bn, 17% more than at the start of January.
"Although the amount of overall Muni bonds funded by through tri-party repo is low both in absolute and relative terms, the decreased appetite for municipal loans in the tri-party repo world and the increased risk perception in the wake of their exclusion form the HQLA list suggests that holders of these assets would face a tougher time financing these assets in the repo market," said Colvin.
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