The Municipal Bond Market is in Trouble and Here’s What You Need to Know

The Municipal Bond Market is in Trouble and Here’s What You Need to Know

The municipal bond market, a crucial part of financing for American cities and states, is facing some major challenges. First, Citi announced in October that it would be leaving the public finance market by 2023. Then, UBS followed suit by significantly scaling back its muni bond underwriting operation. With these moves, experts warn that the municipal bond market could be in trouble. In this blog post, we’ll take a closer look at what’s happening and what it means for the future of municipal banking.

Let’s start with the news from Citigroup. By exiting the public finance market, the bank essentially said that it would no longer be underwriting new municipal bonds. Instead, it will focus on selling existing bonds and providing advisory services. This is bad news for cities and states looking to issue new bonds to pay for infrastructure projects, public works, and other needs. With one fewer major player in the market, there is less competition for underwriting services, which could lead to higher fees and less favorable terms for issuers.

Citi’s move comes after the bank was fined $18 million earlier this year for overcharging clients in the muni bond market. While the bank will continue to work with existing clients, it seems clear that it no longer views the public finance business as a key part of its future strategy. Experts warn that other big banks could follow Citi’s lead, further reducing competition in the muni bond market.

Meanwhile, UBS has announced that it is scaling back its muni bond underwriting business significantly. The bank will focus on underwriting bonds for its current clients, but it will no longer seek new business in the market. This decision comes after several years of declining revenue in its muni bond division. With the bank pulling back, there will be even less competition in an already tight market.

Another factor contributing to the uncertain future of the municipal bond market is the recent rise in interest rates. With rates at their highest level in years, borrowing costs for cities and states have also risen. This could make it harder for issuers to get favorable terms on new bonds, further reducing demand for underwriting services.

Conclusion: With major players like Citi and UBS exiting the municipal bond market, and rising interest rates making it harder for issuers to get the financing they need, the future of municipal banking is uncertain. However, there are still some reasons for optimism. For one, there are still many banks and underwriters who are actively pursuing municipal bond business, so competition is still alive in the market. Additionally, the new federal infrastructure bill could provide a much-needed boost to the industry. For now, though, cities and states looking to issue bonds will need to be prepared for a more competitive, less favorable market. As always, it pays to stay informed.

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