The Municipal-Bond Market Is Now Controlled by Just a Few Firms.
Concentration benefits firms like Nuveen and Vanguard, as well as some investors, but critics see risks if the market cools
A few behemoths are increasingly dominating the municipal market, helping to lower prices for many investors but also sparking worries about concentration and influence.
There has been a mammoth shift in the $4 trillion muni market over the past decade as investors have increasingly used professional money managers to invest in both high- and low-grade state and local government debt. Mutual-fund holdings of municipal bonds now total $738.6 billion, according to Federal Reserve data, a more than 50% increase since 2009.
This shift has been particularly beneficial to firms like Nuveen LLC and Vanguard Group. Since 2010, more than one in three new dollars going to muni funds classified as high yield has gone to Nuveen, according to an analysis of Morningstar Direct data through June. Over that time, almost a third of new money going to all muni funds has gone to Vanguard.
Individual investors can benefit from the concentration. By buying a share of a fund, rather than owning a single municipal bond outright, they increase diversification and can reduce their losses in case of a default. And as asset managers scale up, they pass down the benefits to investors in the form of lower fees, they say.
But critics say having just a few money managers dominate raises concerns about the traditionally safe muni market’s ability to withstand cooling interest from investors after one of the hottest streaks in recent history.
When everyone runs for the exit at the same time…no one wants to be the buyer of last resort,” said Charles Grande, head of municipal credit research at UBS Asset Management, which oversees about $16 billion in munis. “The concentration in large municipal asset managers will have ramifications during volatile times in that it will make the swings greater one way or another.”
Despite the concerns, muni-bond funds are on track for big years.
High-yield funds have lured $11 billion in new money this year and are on track for the biggest inflows through July since at least 1992, according to Refinitiv data as of July 10. Fund flows in the broader municipal sector are on pace to hit the same high, the data show. Investment-grade and high-yield muni-bond yields are hovering at multiyear lows as bond prices have risen.
Much of the new money is flowing to the five biggest money managers, which oversee more than half of all assets in funds classified as high yield by Morningstar. Part of this is a result of consolidation. Invescobought OppenheimerFunds in May, combining two of the biggest money managers that buy junk munis.
Size is a big advantage in muni bonds, which has helped the large firms get larger.
Large money managers tend to buy more bonds and therefore develop closer relationships with underwriters selling bonds on behalf of state and local governments. Additionally, they can have more analysts on hand to review complicated bond deals with less traditional financing structures.
In February, Dallas-based Preston Hollow Capital LLC sued Nuveen, alleging the company used its power to try to strong-arm banks into not doing business with the smaller manager.
Filings in that case include transcripts of calls between Nuveen executives and municipal-bond departments at Deutsche Bank AG , Morgan Stanley and Goldman Sachs Group Inc. in which Nuveen threatens to cut off business relationships unless the banks boycott Preston Hollow.
Representatives for Goldman Sachs and Morgan Stanley said the banks didn’t cut off any relationships with Preston Hollow as a result of the conversations. Deutsche Bank declined to comment.
The high-profile list of firms involved in the case attests to the increasing sway of the largest asset managers. As municipal-bond investors’ money is concentrated in the hands of a few, the decisions of any one manager can have a major impact on the entire market.
“High-yield paper is in such demand right now, but it’s not always the case,” said Howard Cure, director of municipal-bond research at Evercore Wealth Management, which invests in public debt. “In a weaker economy or a tougher market, it’s much tougher to place it. So you need mutual funds with significant financial resources to be able to place the paper.”