JPMorgan [JPM], the nation’s third largest municipal underwriter, and Charles Schwab [SCHW], one of the world’s largest financial services companies, have joined forces to meet what they see as increasing demand from retail investors in the fixed-income market.
The agreement, three months in the making and announced yesterday, gives Schwab preferential treatment in JPMorgan’s new-issue and secondary municipals, as well as corporate debt and other fixed-income securities.
“We are a large player in fixed income, in corporate bonds, in municipal bonds, in new-issue business, and this gives our issuer clients access to an additional 7.8 million retail customers,” said Matt Zames, co-head of global fixed income at JPMorgan. “Municipals factored very heavily in our decision to expand our retail footprint. There’s no doubt about it. Retail demand is quite substantial and it’s growing.”
For Schwab, which holds $1.49 trillion in client assets, the agreement offers instant access to all of JPMorgan’s underwriting volume as well as its fixed-income research.
“With the growth of interest in fixed income, we felt that expanding the depth and breadth of what we could cover would really meet more of our clients’ needs in a super way with an outstanding partner,” said Andy Gill, senior vice president of fixed income at Schwab.
“We can deal with other underwriters as client need arises, but the majority of the bonds that our clients need will be able to be underwritten by JPMorgan,” he said.
As the baby boomer retirement looms, many individual investors are attracted to municipal bonds as a way to provide diverse, reliable income with a tax advantage, according to Gill.
Also, in the wake of the global financial crisis, many investors seek to avoid volatility in the stock market and instead find a predictable stream of income
JPMorgan’s retail network was also extended in August 2008 through an agreement with UBS Wealth Management. It was smaller in scope, however, limited to new muni issuance only.
“It is becoming increasingly important for issuers to distribute their securities to retail, to the constituents that make up their municipality,” said Paul Palmeri, head of sales and trading for public finance at JPMorgan.
“Those are the people that live in the communities, pay taxes and support those municipalities. So from that standpoint, they like to be able to serve those constituents when they have demand for their product.”
In addition to traditional munis, Gill said Schwab clients are seeking access to Build America Bonds, the taxable asset created by the American Recovery and Reinvestment Act in February 2009.
“Retail clients are looking across the broad spectrum of investments that they can choose, and the yields and relative security of Build America Bonds have been very attractive,” he said.
Retail investors typically make up about two-thirds of the municipal market base, according to the Federal Reserve. Similar data for BABs is not available, but anecdotal evidence suggests that domestic retail buyers take a back seat to life insurers, pension funds, and foreign investors.
Palmeri said that’s changing.
“Currently, the holders of BABs are more institutions than retail, but certainly demand is building from individual investors, and we expect them to become a bigger part of the distribution over time,” he said.
To date this year, JPMorgan has senior managed 102 municipal issues worth $12.3 billion — including $2.66 billion of BABs — giving it a 10.2% market share overall, according to Thomson Reuters.
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