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HQLA Rule Change Good For Muni Investors


I’m surprised by your article, “House Votes To Treat Munis As ‘High Quality’ In Bank Rule.” Munis mainly trade by appointment only, and based on my own experience during the 2007-2008 crisis, there was a lack of liquidity in munis, with prices taking a beating.

Now, don’t get me wrong, as I bought into the distress we were experiencing back then and wound up with very profitable positions in the end.

But given how few munis trade in any size, other than maybe “AAA” and “AA” bonds issued by states, I’d hardly call munis a highly liquid class of instruments.

I think the House bill is ill informed. In the past, you’ve said munis are bought mainly to buy and hold until maturity by retail investors, so why would those types of investments now be considered good sources of liquidity for big banks during times of stress?

Seems a bit disingenuous to me, given all your past postings.



James A. Klotz responds:

Although, as you said, we recommend a buy-and-hold strategy for munis, clients invariably have reasons to sell their securities.

Without support from the financial center banks, the bid side of the municipal market can often be illusive. You discovered this in 2008, when banks were out of the market entirely because of their own financial challenges.

Our primary interest is not the quality of bank assets but enhanced liquidity for our investors. This should not be construed as disingenuous.

Feb 24, 2016

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