[ARTICLE] Solving the Muni Market’s Fundamental Credit Data Problem

VP of Strategic Data Operations Triet Nguyen discusses solving the muni market's credit data problem in BDA's Fixed Income Insights quarterly magazine.

Says Triet, “Municipal bonds are a unique fixed-income asset class, arguably second only to Treasuries in terms of average credit quality, with the ability to satisfy any investor’s visceral opposition to paying taxes. Yet, they are also maddeningly difficult to manage from a credit research, trading, and portfolio management standpoint. Blame it on the sector’s historical lack of accurate fundamental credit reference data, itself a product of the sector’s “bespoke” nature.

With the technology tools now available to the industry, isn’t it time we try to find a solution to this problem?

Triet discusses the unique characteristics of distinct regional markets. He notes that special districts in every state, as well as non-profit entities, provide an added twist. Further, current classification schemes fall short, due to the large number of obligors. “The very complex nature of the municipal market highlights the importance of correctly identifying where your ultimate credit risk lies,” he writes.

What the industry needs, he posits, is a comprehensive relational database linking every single bond issue to its correct “direct obligor,” at the individual Cusip-9 level, based on a rigorous and consistent credit-driven methodology. This new classification scheme would allow market participants, both on the buy and sell sides, to correctly identify the source and nature of credit risk in their holdings and to aggregate such risk into meaningful sectors that share common risk drivers.

It wouldn’t require much of a stretch of the imagination to see how such a system would enhance the information flow and perhaps even improve liquidity in a market as heterogeneous as the municipal sector.

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