Municipal bonds remain a viable, high-quality source of liquidity for banks, experts say, although they are divided about whether the collapse of two regional banks will curtail or eliminate the sector’s ownership of municipal bonds. Following the collapse of California-based Silicon Valley Bank on March 10 and New York-based Signature Bank on March 12, experts differ on how this will impact their holding of municipal bonds. Some say it will continue unabated, others say it could peter off, yet others believe banks may alter their duration to avoid the pitfalls of SVB and Signature. “I do not believe banks will broadly reduce their ownership of municipal debt in light of the recent collapses of SVB and Signature Bank,” Chris Brigati, managing director of municipal investments at Valley Bank, said. Bank ownership of municipal bonds amounts to approximately 15% of the $4 trillion market, falling slightly during the COVID 19 pandemic, according to experts. … So far, there is little evidence that ownership of munis by banks — which hold about $540 billion of municipals, $140 billion of that is held by regional banks —will dwindle, according to Eve Lando, portfolio manager and managing director at Thornburg Investment Management. About half of that exposure is in direct loans, so it shouldn’t be part of a sell-off, Lando noted. “The total muni market is $4 trillion, so in isolation, the large bank numbers are a small fraction of the entire market and unlikely to flood the market,” she said in a March 21 report.
Source: The Bond Buyer