[Podcast] Triet Nguyen on The Muni Lowdown

Managing editor Paul Greaves speaks with Triet Nguyen and reporter Kunal Kamal about evolving high yield municipal market risk factors.

In the “High Yield Horizons” episode of podcast “The Muni Lowdown,” the discussion centers around the current state and future outlook of the municipal bond market, particularly in the context of increasing climate risks. Despite significant climate challenges, such as rising sea levels and more frequent natural disasters, the municipal bond market remains relatively unaffected by these factors. Investors continue to show confidence in municipal bonds, driven by the assumption that federal disaster aid will cushion the impact of climate-related financial strains.

Triet Nguyen, vice president for strategic data operations at DPC DATA, highlights this issue: “One of the main reasons the market is still ignoring climate risk is that most participants believe federal disaster aid will continue for the foreseeable future. This expectation has created a sense of complacency, leading to a lack of urgent action in pricing climate risks appropriately. Our market typically doesn’t react to slow-moving credit developments, like climate change, until there’s a catalyst event of some sort. This is similar to how the public pension crisis was ignored until the financial crisis of 2008.”

“DPC DATA has been around for over 30 years and we have always been collecting, storing and extracting data from all types of municipal market documents… Over the last 5 years, we’ve developed a new financial database for municipals which is designed to address all the perceived coverage gaps in the marketplace, from smaller, non-rated issuers to high yield sectors… We’ve also put together a methodology to identify the correct Obligor for most muni issues, based strictly on credit… More recently, we’ve partnered with a couple of major climate risk data providers, Spatial Risk Systems and First Street Foundation to incorporate their climate risk scores into our financial database.”

The podcast also addresses the role of rating agencies and their methodologies. Currently, these agencies do not significantly factor long-term climate risks into their ratings, focusing instead on short-term economic indicators. This practice contributes to the market’s overall underestimation of climate risks.

Moreover, the discussion points out that insurance markets are already feeling the strain of climate change, with rising premiums and insurers retreating from high-risk areas. This dynamic is expected to eventually impact property values and municipal revenues, which could, in turn, affect municipal bond creditworthiness.

In summary, while the municipal bond market currently appears resilient, the increasing frequency and severity of climate-related disasters suggest that a market correction is inevitable. As Nguyen notes, “This sense of complacency can lead to significant financial repercussions when the reality of climate risks can no longer be ignored.” The need for incorporating climate risk assessments into municipal bond evaluations is becoming more pressing as climate change continues to pose a growing threat to economic stability.

Listen to the podcast.