On February 25th 2020, Senior Vice President of Investments Matt Caire (pictured left) represented Houston Trust Company at The Bond Buyer Texas Public Finance Conference in Austin, Texas. Municipal finance professionals from across the state debated some of the biggest issues driving the market today, such as ESG Bonds, Taxable Municipals, and Pensions.
Matt joined the Buy Side/Sell Side panel to discuss Houston Trust Company’s stance on buying and selling in the municipal bond market, hopes for legislation in the future, as well as factors contributing to investor demand for fixed income securities.
Interested in learning more about our thoughts on these issues? Highlights from the panel discussion can be viewed below:
Panel Discussion Highlights
Q: Where are we finding opportunities in the municipal bond market?
MC: Our strategy at Houston Trust Company is somewhat unique and differentiated in that we only invest in Texas bonds for our clients. We feel that Texas is so large, geographically, that we can achieve a high degree of diversification by purchasing credits located in various areas within the state. Thus, we diversify our holdings across different issuers with varying sources of revenues in order to further incorporate a layer of economic diversification in our client portfolios.
Within Texas credits, we are finding value in Texas “kicker” or callable bonds. We like MUD (Municipal Utility Districts) bonds and essential service revenue bonds for their strong underlying credit characteristics. While the additional yield “pick-up” offered in callable bonds has tightened recently, we are still buyers of Texas kickers in this market. From a curve positioning perspective, we view the short end of the yield curve as being fairly rich (expensive) relative to history at these levels.
Q: What are the panelists thoughts on an infrastructure bill?
MC: We are hoping for an infrastructure bill to pass at the federal level, as this would likely add to the supply of municipal bonds through increased issuance. States and local municipalities would issue debt in the municipal bond market to fund infrastructure projects, but there appears to be many projects somewhat “on hold” until an infrastructure bill can be passed.
Q: Preferences for investing in individuals’ bonds versus bond fund/ETF?
MC: At Houston Trust Company, we only invest in individual bonds. We believe there are inherit flaws with fixed income indexing at its core. Furthermore, we strongly prefer investing in individual bonds be that an investor is contractually owed their full principal, or par value, upon a pre-defined maturity date. For example, if rates were to rise sharply from here, both individual bonds and bond funds would be expected to fall in value. However, investors owning individual bonds have the option of holding their bonds until maturity whereby they will receive their full principal value back. Investors in bond funds have no such option, as bond funds do not have maturity dates or any assurance of the return of one’s principal.
Q: What factors are driving investor demand for fixed income securities given how low rates are today?
MC: Portfolio rebalancing has been a tailwind for flows into fixed income. When we look at asset class returns from a high level over the past 11 years, equities have been on a steady climb higher year-in and year-out, with the exception of a few minor down years like we saw in 2018. Thus, most financial advisors, pension consultants, and the like who run balanced portfolios (containing a mix of both stocks and bonds) have had the need to continually trim their stock allocations and re-balance the proceeds in favor of the bond component. This allows them to maintain their target asset allocations in clients’ portfolios.