The Digital Future Of The Municipal Bond

The Digital Future Of The Municipal Bond

The world as Americans know it has been built using funding raised through municipal bonds. Do you park in public lots? Fly out of airports? Ever driven across a bridge? Many of the things that we take for granted in our day to day lives illustrate the importance of funding from municipal bonds.

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These bonds were the focus of discussion last month at the Municipal Bond Women’s Forum hosted by Eaton Vance, held during the highest issuance week in several decades.

Pricing, Transparency, and Technology

Municipal bonds are challenging to evaluate or price due to the difficulty in obtaining relevant market data, a challenge that has increased dramatically since the financial crisis in 2008. Transparency and accuracy are more important than ever to those using pricing data, but the difficultly in gathering market data from municipal bond trades only adds to the complexity of attaining full transparency in this market. Many trades today are still completed over the phone verses a trading platform. Undocumented trades only add to the complexity of pricing and regulating the market because the raw data needed to draw conclusions is not readily available.

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Bond pricing vendors are forced to find a balance of first-rate technology and informed evaluators. Technology, especially electronic trading technology, is expected by some to be a transformer in this marketplace due to the shift to a passive environment. While some appreciate the new technology, not all fully accept that electronic trading would replace the role of a sales person. Others believe electronic trading would greatly enhance efficiency and create the time that salespeople need for more important conversations. But at a time where people are wondering just how passive the market is going to become, embracing technology is no longer optional.

Still, electronic trading is poised to be disruptive in the municipal bond market and is expected by some to be a major player in regulation, automation, and pricing.  As trades are increasingly made on digital platforms there will be data to mine and thus conclusions to draw on market color. Parsing technology will be key to this, making it possible to collect the raw data necessary to price bonds. But, will electronic trading and parsing lead the way to increased transparency?

As the market moves from active to passively managed, firms are tasked with finding efficiencies and lowering costs. Electronic trading is a way to reduce costs. Reduction of the human element lessens the costs related to errors and additional service fees.

MarketAxess is an electronic trading platform for corporate bonds and other fixed income securities. The growth of its reported sales and trading price over the past 10 years is an example of the growth in the realm of electronic bond trading. It will be interesting to see the growth of MarketAxess as it begins to expand in the municipal bond space.

Municipal Bonds

The market is expected by some to grow as the need for investing in infrastructure has been a hot topic during the election season. The American Society for Civil Engineers (ASCE) is calling for spending of $3.6 trillion on infrastructure. The municipal market is currently valued at $3.7 trillion.

With opportunities in the municipal bond market increasing and a technological revolution thats both complicating and facilitating investment strategies that target it, it’s critical to consider a few things when selecting a pricing vendor for municipal bonds.

Namely, how will the role of an evaluator change or be maintained as technology is integrated into the pricing process? What are the quality assurances, and what does it take to have a price challenge reviewed? And are you consulting the market on the evaluator’s decisions when building out technologies?

Answers to these question can help align your strategy to a technology solution that meets your unique needs.

Article by Jennifer Kelly, FactSet

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