After a stint on the trading desk at Shawmut Bank in Boston, Hayes in 1987 moved to the asset management division at Merrill Lynch, which merged with BlackRock in 2006 and where he remained for 26 years. He’s led the muni bond group at BlackRock since July 2007.
Hayes’ interest in the asset class has grown as the market has evolved around him. In his role at Merrill and BlackRock, he has witnessed some of the biggest changes in the investment management industry. To begin with, he recalls how the largest muni buyers varied over the years. In the 1980s, it was the banks.
“They largely exited the market,” Hayes said. “They’re back again. They haven’t come full circle, but certainly they’re a presence in the market.”
Insurance firms were very big buyers in the 1990s, a time that saw the growth of the closed-end mutual fund.
In the early 2000s, the industry of the single-strategy muni hedge fund grew rapidly. It largely collapsed in 2008, leaving the market without a consistent, large buyer outside of the general retail customer.
In addition, the bond insurance industry grew and changed the way people looked at munis, according to Hayes. When he started in the 1980s, muni bond insurance was mostly in its infancy and a fairly small part of the market. It grew dramatically, reaching its highest market penetration of 57% in 2005.
“People were able to get in and out [of a muni bond],” he said. “It became a very liquid, actively traded market because of insurance. And now insurance is fairly insignificant again.”
Hayes found the 1990s exciting, marked by the advent of closed-end funds and some other structural changes. And the past six years have been “extremely interesting,” he said. Most important, the asset class has completed its transition away from an interest rates market to a credit market.
The regional nature of the business has changed, as well, Hayes said. Large regional centers in places such as Boston, Philadelphia, Dallas, Los Angeles and San Francisco had very strong trading, underwriting and distribution operations.
“Everybody had their own bond club: the Bond Club of Boston, the Bond Club of Chicago, etc.,” Hayes said. “Now some of them still exist, but the very strong regional presence that did business more exclusively with that particular customer in that particular area” has declined.
There are still a lot of strong regional players, and some of the big money-center banks and dealers are also a big presence in the market, Hayes said. But Bloomberg terminals have changed the way muni participants interact, he added. Participants used to conduct business mostly over the phone. Today, a large percentage of the business is done over Bloomberg terminals.
“Through email and Bloomberg terminals, information travels faster than ever before,” Hayes said. “However, a result of this is the regional presence isn’t what it used to be.”
Still, it doesn’t take a Bloomberg terminal to show that muni investors are in for a change this year. Those who have gotten accustomed to the robust total returns of the past two years should adjust their expectations, Hayes said; it’s likely to be a year of coupon-clipping for them.
Unlike the past two years, investors should not just pour money into munis and long duration and expect great returns in 2013. They need to remember why they bought munis in the first place: because the taxable equivalent yield on them is so compelling versus their alternatives.
Buying in 2013 will be a timing issue, Hayes said. Amid some of this volatility, there should be opportunities to put some of the money on the sidelines to work in any sell-offs.
“You have to really pick your spots,” Hayes said. “Your timing is going to be critical to when and how you invest. This year is really going to be about playing defense. It’s trying to protect all that you’ve earned over the last two years.”
To do this, investors must come down a little in duration along the yield curve, according to Hayes. The Federal Reserve has broached the possibility of ending some of its quantitative easing. If the market begins to anticipate that, it will react ahead of Fed actions.
Regarding credit, there has been a big reach for yield the last couple of years, shown by interest in high yield. This year, investors should look upward a bit in quality, Hayes said.
“The A-rated part of the credit spectrum offers the most value,” he added.
