Muni Trading
Been reading a lot on this forum that desks that trade a ton of new issue, or are on more “deal” centric desks, like Munis, ABS, CMBS, HY, etc., are the “go to” in the age of electrification. This makes sense to me logically, and recently one of my friends who’s higher up in a muni S&T approached me with a potential opportunity here. Always been interested in S&T. Wondering if anyone has any color/insight on the muni asset class on the S&T side regarding opportunity, comp, outlook, etc. - any insight or experience really. I know the muni banking side isn’t great in terms of hours/comp (long hours + lower comp than other IB since fees are low), but I wonder how this differs on the S&T side.
You can break munis down into two categories - new issue, and secondary. If the offer is for secondary trading comp is kind of meh...it’s not bad, but secondary books at BB shops are breakeven books. You exist solely to provide liquidity to Blackrock, State Farm, etc. so they buy your deals, which means you’re always high and losing dough. Now if the offer is for an underwriting desk that’s a good gig. Negotiated underwriting is honestly boring and you depend on other human beings to originate deals so keep that in mind. Competitive underwriting is where the money is at, highest comp out of all three by far and the most coveted position
Isn’t syndicate the ones underwriting the debt? From what I heard from my buddy the he said that at his shop (not sure where they rank but pretty solid BB) that his traders both trade the secondary flow + bid on large competitive deals, while syndicate prices/takes down any unsubscribed debt. Can I ask why you say that there’s no money to be made on the secondary flow? He said he sees bid ask of 5bps quite often, which to the best of my understanding, is pretty wide for any FICC market nowadays. Also - off topic but what are your thoughts on Muni sales as a seat at a solid BB? Thanks Tuna - great post on the forums as always.
Each firm has a slightly different set up, but at most of the places I have worked trading and underwriting/syndicate work pretty closely especially on the competitive side since if you are the firm the buys the deal and does not sell the bonds right away they end up in the trader that trades that sectors book. Its a group effort between underwriting, trading and sales to try to buy competitive deals using structures and pricing where the bonds and be easily sold to clients. The ideal situation is when you buy a deal with a tight cover and then sell all the bonds within the next couple of hours. On negotiated deals their is less input from the traders during the process since the bonds are usually sold during the syndicate period but if they are not sold during that period the lead usually has to take them down.
Syndicate completely runs negotiated transactions. As for competitive underwriting your trader will take risk with you in joint books. So say you buy a 500mm deal, have 400mm done, and have 100mm in risk to take on - all that risk goes in a book that you and a trader share so it’s a group effort. That being said the transaction is solely run by the underwriter, I can always stiff my trader on risk too and keep the bonds myself. I say secondary is a low margin business because you are looking to literally breakeven on your book. If you have an account that gives you strong orders as a secondary trader you are expected to lift them offers/bids at whatever level they want, so you’re a bitch to your major accounts basically making it tough to make money. As for Muni sales, if you are being given a decent book or will eventually inherit a decent book I’d say go for it, otherwise run far far away
How many deals a week are you bidding on/what is your hit rate and sweet spot in terms of size? I would guess working at a BB you are going to be more focused and aggressive on the larger deals? I have always been cross product in my sales career (started my career as a trader not in munis) so I while I do munis I have never been all that plugged into the desk politics. I spent time at a BB and regional and it always seemed like trading ran the show especially at the BB (generally the HY guys or the long end IG trader) and that underwriting was sort of a redheaded step child who jammed the desk with off cpn bonds that had a limited buyer base. Maybe the places I have worked have just not been very good at it, I have also never really covered any accounts who are super active in bidding on competitive so I don't know a ton about the process to begin with but guessing that on the larger deals BBs tend to see most of the pre-sale orders and on the smaller deals the regionals will see more pre-sale orders?
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