JPMorgan Beefs Up Bond Fund Business
June 7, 2010
JPMorgan, consistently one of the top municipal bond underwriters, has been responding to increased appetite in the market recently by expanding its retail networks, marketing taxable munis for international distribution, and bulking up its public finance staff.
The firm has ranked third among muni underwriters in the country over the past five years. From January through May, JPMorgan senior-managed 158 issues worth $20.8 billion, ranking it third with a 12.3% market share, compared with an 11.4% share last year, according to Thomson Reuters.
Known historically for its institutional distribution, the firm began beefing up its municipal retail network through an agreement with UBS Wealth Management in August 2008.
In January, the two-year deal that gave UBS access to new-issue supply and JPMorgan access to UBS' nationwide retail sales force was extended to 2013.
In April, JPMorgan also teamed up with Charles Schwab, whose clients now have access to JPMorgan's new-issue and secondary munis, plus other fixed-income products.
"We pursued retail distribution partners whose platforms were complementary to ours," said Paul Palmeri, head of public finance sales and trading. "Leveraging Charles Schwab's and UBS' retail distribution capabilities through JPMorgan gives issuers access to an enormous retail network that very few can rival."
With the agreements in place, the firm can reach nearly 18,000 advisers, including 8,200 brokers through UBS and 6,000 registered investment advisers through Schwab.
By numbers, that puts JPMorgan "on the same plane" as Bank of America Merrill Lynch, according to Palmeri.
He also called the agreement comparable to the venture between Citi and Morgan Stanley, which in January 2009 formed Morgan Stanley Smith Barney.
"The more buyers we can bring into the muni market, the better it is for everyone involved," said Jeff Bosland, JPMorgan's head of public finance.
Increased retail demand should allow the firm to issue bonds at a lower yield, and give it more leverage when pricing for institutions, which typically occurs after a retail order period.
Inflows into municipal bond mutual funds, which can offer an indication of overall retail demand, have averaged $396 million a week for the past four weeks, the largest amount since early April, according to Lipper FMI.
Compared to the final four months of 2009, when weekly inflows averaged $1.7 billion, current demand looks weak. But relative to a longer average - say, from 2000 to 2008, when the weekly inflow average was $159.1 million - retail demand has clearly picked up.
Part of that growth relates to individuals seeking tax-exempt assets as tax rates are anticipated to rise, but a larger factor stems from the broader appetite among investors for fixed-income assets in general, Bosland said.
Demand from international buyers has also been growing for Build America Bonds, the taxable muni debt created last year in which the federal government covers 35% of the interest costs.
Palmeri said more foreign clients are viewing BABs as a "higher-grade corporate," as the credit quality of municipal debt is often considered stronger than corporate debt. The yields can be higher, too. In late May, when Eurozone debt concerns prompted a flight to quality causing Treasury prices to rise dramatically, BABs became even more attractive than usual.
The spread between long A-rated BABs and Treasuries widened to about 210 basis points, up from around 170 basis points at the beginning of the month, according to JPMorgan's daily analytics publication. The spread between comparable corporate bonds and Treasuries also widened, but only to about 165 basis points from 140 basis points, based on the JPMorgan US Liquid Index.
The attractiveness of BABs helped JPMorgan price a $1.16 billion deal for Washington state late last month, which included 30-year BABs issued with a 5.14% yield, 130 basis points above Treasury rates.
Almost one-fifth of the deal, which was rated one notch below triple-A by all three rating agencies, were sold to seven foreign investors, JPMorgan said.
The Washington deal is just one of 67 BAB issues that the firm has senior managed since the product was introduced in April 2009, according to data from Thomson Reuters. In 14 months, it ran the books on $13.6 billion of BABs, or more than 12% of all BAB issuance.
"Appetite can be substantial," said James Lansing, head of syndicate and debt capital markets. "Foreign investors are hungry for quality and yield, but many are still in the education stage."
JPMorgan, among other firms, has been trying to feed that hunger by taking BABs on the road internationally.
It has introduced investors to the new asset in Canada, Europe, Australia, and Asia, often with the help of foreign muni offices that it opened in 2003. In the Tokyo and London offices, the staffs include muni-specific traders.
Among the new buyers attracted to BABs are sovereign wealth funds, pension funds, asset managers, and insurance companies, according to Lansing.
Sovereign investors in particular have shown interest in general obligation debt because it compares favorably against sovereign debt, particularly in the current climate surrounding the Eurozone crisis, he said.