January 30, 2025 • 22 mins
Municipal bonds are the foundation of how American cities and states operate. And a big reason investors love “munis” is their tax-free status. But if you think that makes muni exchange-traded funds sound boring, think again.
On this episode, Eric and Joel speak with Eric Kazatsky, head of municipal strategy at Bloomberg Intelligence and co-host of the podcast Masters of the Muniverse. They discuss the storied history of munis, how they figure into portfolios—and how that favored tax-free status could be at risk in President Donald Trump’s second term.
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Episode Transcript
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Speaker 1 (00:05):
Welcome to Trillions. I'm Joel Webber and.
Speaker 2 (00:07):
I'm Eric Belchernas.
Speaker 1 (00:13):
There's this theme that we've been talking about for a while, Eric,
and you've been wanting to do it. I've been resisting.
Speaker 2 (00:21):
So I don't know how many episodes we've done.
Speaker 1 (00:23):
Maybe two hundred we should actually count.
Speaker 2 (00:26):
And there's probably only like forty categories of ETFs, meaning
we've covered many categories multiple times that we've never covered
this one because because of me. Yeah, well, and I
understand it is arguably one of the more boring sounding categories.
I mean I was talking about I would put it
right up around short duration bonds.
Speaker 1 (00:48):
Have you done that one?
Speaker 2 (00:49):
We have? Yeah, because money markets, this is municipal bonds.
Speaker 1 (00:53):
Now, hold on, I'm gonna fall asleep.
Speaker 2 (00:56):
Before people tune out here. Listen a couple things for
of all, One of the most red analysts in Bloomberg
Intelligence is Eric Kazatski, my colleague. I've known her for
years and he's very colorful writer too, And people really
use Muni's, especially if you're planning a portfolio for a
(01:18):
real person. The after tax yield on these bonds is great.
I remember interviewing Bogel Jack Bogel and he was a
big Muni guy. He loved Muni's for his portfolio. And
when I look at some of Eric Kazyski's headlines, what
I like about them is they're so tangible. La Fires,
Texas Battleship, JFK Airport, the Hollywood Strike, DeSantis, and Disney.
(01:41):
There are Muni pegs to a lot of stuff that
we love and know. So I think.
Speaker 1 (01:45):
America is built on the municipal bonds.
Speaker 2 (01:47):
It really is. It runs on Muni's basically. So we
are going to try to.
Speaker 1 (01:52):
Get in other words, a long overdue episode.
Speaker 2 (01:54):
We're going to try to make Muni's cool today. Yeah, okay,
that's our that's our time. I'm going to try to
keep you awake, riveted, and Eric will too.
Speaker 1 (02:02):
I'm in, I'm in. Eric has the bigger job, though,
I'm so ready and joining us on this episode. Eric
Kazatski an analyst with Bloomberg Intelligence who's also the co
host to the podcast Masters of the Universe, this time
on Trillions Muni Land. Eric, Welcome to Trillions.
Speaker 3 (02:22):
Hey, I'm happy to be here, and what a setup.
I wasn't sure where that was going at first, but
you guys turned it around at the last minute. Thank you, Eric.
Speaker 1 (02:31):
You know, as baltun is set up here. Long overdue conversation.
So why do investors like municipal bonds?
Speaker 3 (02:40):
I mean it's really simple. Do you like paying taxes?
I don't like paying taxes?
Speaker 1 (02:46):
Okay, So why are they so boring?
Speaker 3 (02:49):
I think because people are confused by them. But look,
at the end of the day, it's the simplest thing
to understand. Right, Hey, Look, you live somewhere.
Speaker 2 (02:57):
Has a school.
Speaker 3 (02:58):
Undoubtedly that school was built with tax exempt bonds. You
have been to a sports game lately, a concert, Undoubtedly
those have been built with tax free bonds. Airports, roads, bridges.
It's just the easy stuff you see every day that
gets ignored the most. That's really what it comes down to.
Speaker 1 (03:14):
Okay, So there's this tax exemption that munieds benefit from.
How does that work and why are they exempt?
Speaker 2 (03:21):
Yeah?
Speaker 3 (03:22):
I mean, well, so it's been tax law for almost
one hundred years. I mean, the market has been around
that long. But essentially, what you do is the issuer
gets a benefit to borrow at a lower rate, and
that's passed on to the buyers of those bonds and
they get to save the interest that comes in as
income from their federal and state taxes. Now, it doesn't
(03:43):
all work the same. Some states have different laws. But
let's just assume that they're all federally in state tax free.
It's just simple for this conversation. So look, it's a
double benefit, right. The issuers get the benefit of borrowing
lower and the investors get the tax free income. It's
really as simple as that.
Speaker 2 (04:00):
Real quick, Okay, let's just bring one up here. The
I shares California Municipal Bond etf CMF is the ticker it.
I have a yield here of two point eight percent.
So what is the because when I when you talk
un these people talk about after tax yield, what would
be the tax equivalent yield? How much more do you
get if you lived than say California.
Speaker 3 (04:21):
It's so you use the role of two here, right,
Just figure in these high tax dates like New York,
New Jersey, California.
Speaker 1 (04:26):
Just double the yield.
Speaker 2 (04:27):
You'll probably get pretty close.
Speaker 3 (04:28):
Because you know, the highest tax back in California, you're
looking at like thirteen point three percent. You add in
federal taxes Medicaid, you're up near fifty percent, So five
point six percent on a taxi equivalent basis.
Speaker 2 (04:41):
That's pretty cool. See that they don't put that in
the data need because that's keeping you do.
Speaker 1 (04:45):
Yeah, Eric, I need you for something else here, which
is why is that taxes in status potentially at risk?
Speaker 3 (04:53):
Well, it really comes down to the returning president. He
has a mandate in his mind to roll out of
the Tax Cuts and Jobs Act. And look, it's going
to cost anywhere three and a half four point six trillion,
I don't know, pick a number, any number, but you
need a way to pay for it. And every election
cycle it comes up that you know, muni bonds are
(05:13):
going to be at risk. And I think it really
comes down to the fact that people assume that those
people who are buying munis are sitting around with top
hats and monocles, just smoking cigars and enjoying all this
tax free income. But if you look at where the
money's going in muni's, I'm sure we're going to touch
on this. It's going to eats, it's going to SMEs.
Speaker 1 (05:31):
And these are.
Speaker 3 (05:32):
Low cost, low dollar fee structures that are attracting people
not in the highest brackets. So you know, that's really
sort of where the risk comes in. It's going to
impact everyone.
Speaker 1 (05:41):
So just to be clear here, nothing is happening yet,
but it's just part of the chatter about the Trump's
tax cuts, which will become a conversation this year since
he's back in the White House and has control of
Congress and those tax cuts are expiring at the end
of the year.
Speaker 3 (05:59):
Right, Yes, So the Houseways and Means put out a
wish list the fifty pages long, and the union exemption
going away was one of the items on there. But
another thing you need to know about people in munialand
we'd love to be part of the current news cycle,
and this is just another way for us to sort
of pop in there.
Speaker 1 (06:15):
Not to be boring and be part of the es. Yeah.
Speaker 2 (06:18):
Yes, actually thing I tell people that all the times,
Like you give me a headline, I'll show you the
ETF PEG and I like that too. Eric, I, well,
let's go to La fires. Explain to me the Munich
connection here, because I saw you had a note that. Again,
his notes do really well readership wise.
Speaker 3 (06:33):
So yeah, so Los Angeles fire is just another instance
of nature just wreaking havoc on our market.
Speaker 1 (06:41):
You know.
Speaker 3 (06:41):
Look, every year you got hurricane damage in Florida. Inevitably,
it's hitting areas where you know, people are paying taxes.
Those taxes support general obligation bonds, you know, hospitals, colleges,
things are impacted by these weather events. And unfortunately California
it really sort of got out of control with this
sort of unseasonal fire that took everyone by surprise. By
(07:01):
the numbers, we sort of calculated that there was potentially
about seventy billion of you know, MUNI sort of tangentially.
Speaker 1 (07:07):
Related projects at risk.
Speaker 3 (07:10):
What it's actually going to shake out to too early
to tell still, you know, but look, the totality of
the damage would certainly call a lot of people by surprise.
Speaker 1 (07:18):
And what does that mean for bondholders?
Speaker 3 (07:21):
You know, hopefully nothing right. We want to be benign
and in the background, and we want to sort of
keep on with the you know adage that there's never
been a true MUNI default from an act of God.
We haven't seen one yet. I don't really think you're
going to see one here. It doesn't mean there's not
going to be litigation that's going to be painful, especially
for LA Department of Water and Power. The Water Department
is already smacked with the lawsuit. Not sure how it's
(07:43):
going to play out, but they could have some liability.
Speaker 2 (07:45):
Right when has there been defaults? What would cause one?
Speaker 3 (07:49):
Well, I mean you have defaults as far as Puerto Rico,
as far as Detroit, you know, and New York back
in the seventies. Right, it really comes down to bad
fiscal management. Bad fiscal management has caused more issues immuniland
then weather and nature related events at this point.
Speaker 2 (08:03):
So do you cover that, Like, do you look at
where maybe the code red situations are, where there's like
total mismanagement of funds. I don't know why I keep
thinking of Illinois, like are they like that?
Speaker 3 (08:15):
Your right to think that. Yeah, Look, we try and
turn on the lights and see where the cockroaches are
running as much as possible. But you know the problem
is these are slow burned things, right, Detroit played out
over years. It wasn't a new issue. Puerto Rico, same thing.
You know, certainly Chicago, Chicago board ed, Illinois. They all
have their problems. The problem is they're able to kick
(08:36):
the can down the road.
Speaker 1 (08:38):
You know.
Speaker 3 (08:38):
We just try and stay on top of it and
tell investors sort of where the risks are.
Speaker 2 (08:43):
So let's talk about practical application. Let's say you have
a munique portion of a portfolio. The two biggest ones
on the market are MUB and vtebs. That's our shares
in Vanguard. Those have like thirty five and forty billion dollars.
They're the studs. Like most categories, it's like the two,
the big two have the top ETF. So should someone
just buy one of those and call it a day,
(09:05):
or like, what does a munich analyst think of those
two sort of big timers.
Speaker 3 (09:11):
It's like vanilla ice cream. It's great, it's a fine flavor,
it's a top seller, but like, you can only have
so much of it, right, Everybody wants some variety, and
that's the beauty of the ETF market is that it's
bringing in a lot of alternative flavors and small boutique
ice cream providers. Let's say you know, MUB and b
TEP are great, right, measured by flows, they are. They're
the biggest creatures, sort of like roaming around Uniland. The
(09:33):
problem is they miss a big portion of the market.
They're passive, which is not a bad thing, but they
don't invest in hospitals, they don't invest in higher ed
they don't invest in bonds that are subject to alternative
minimum tax. We wrote a note earlier in the year
they miss about eighteen percent of the investable market for
unis just based on their sort of stringing criteria, and
(09:54):
unfortunately that eighteen percent makes up a big portion of
returns in every single year. So I think investor are
missing out right.
Speaker 2 (10:08):
I remember back I don't know five six years ago,
MUB was the big category leader by far. Then Vanguard
launched one started climbing the charts VTEB, and I remember
MUB I think was twenty five basis points. Vanguard was
like six or seven, and MUB slashed its fee in
one shot from twenty five to seven. And I thought,
(10:28):
that's why I call it the tyrodome. Jrol. You're the
leader of the category, most volume, most assets, but you
know what's about to happen, and you basically cut off
both legs and an arm. That's it. I've never seen
self cannibalization that great. But there's still number one.
Speaker 1 (10:44):
It worked.
Speaker 2 (10:45):
I mean, had they not done that, I think vteb's
three four times bigger. So that's also something Eric. Just
before we get to the unique ETFs, the MUNI mutual
funds they're all active, right, There really is not a
lot passive there. And here you have two ETFs at
f five basis points each. How much does that factor
into all the money that's rushed here, Given that most
(11:05):
mutual funds are like, you know, eighty basis points to
maybe one point five percent.
Speaker 3 (11:11):
It's factored in a ton When you think about who
the majority of folks are buying this thing, right, you
have a lot of retail people just directly buying. But
it's also part of platform investing.
Speaker 1 (11:21):
Right.
Speaker 3 (11:21):
So if I'm an RIA, I'm charging one percent on
a portfolio, and I can go from let's say, splitting
a thirty basis point fee with a mutual fund and
keeping seventy to keeping ninety five and I have fives
you know for investing in MUB or VTAB. That sounds
much better to me, right, And my clients are probably
like none the worse off as far as exposure. But
(11:42):
I think again, two different styles, right, If you're worried
about performance, you may not want to go dout on
the road. If you're focusing on just acid allocation and fees,
they're certainly the most attractive thing out there.
Speaker 1 (11:56):
Okay, So hot sauce has come for every ETF I
can think of, what does hot sauce in muni bonds
look like?
Speaker 2 (12:04):
So, you know, one thing that was launched very recently
was Spider has target Maturity Muni bonds, So for example
at Spider SSGA MY twenty twenty eight, so that's a
niche version, so that that means all the bonds mature
in that year. That way you can like time your
duration a little bit. We've seen some other things launched
like tax aware muni bonds, a lot of short duration
(12:27):
muni bonds, high yield, I know high yield. Eric was
one that back when COVID happened. Eric and I talked
a lot because there was NTF HYD which is the
van k hig yield muni and this thing traded it
like twenty to thirty percent discounts to NAV. And of
all the bond ETFs, this was the worst in terms
(12:50):
of it obviously held the least liquid stuff that its
price was deviating that much from the NAV, although the
NAV was based on old bond prices, so it was stale.
And it's interesting that ETF, even though it was so,
it turned into a closed then fund essentially it's took
in more assets since then and the volumes the same,
So it seems like people know how to roll with that.
(13:12):
But Eric, what's the liquidity like in this scene? Like,
is a high old MUNI bond etf like something that's
for normal people or is that something that really just
traders should use. No.
Speaker 3 (13:22):
I think there's a lot of liquidity, right. Look, what
happened in the early days of COVID, I feel like
is a complete anomaly, right, And I think the market's
a lot more prepared from a market structure standpoint than
it was in twenty twenty. A lot more things have changed.
So let's say we had a sharp sell off again,
I think the folks who are running hid if I
was them, I would imagine they have a much deeper
(13:45):
ig basket of bonds to throw over the side of
the boat. If there's some sort of like sharp correction
then there was back then, right, just to sort of
like hedge against that. But you know, look, I think
the fact that this market is really sort of like
if you think about it in terms of the the
you know, the fun companies are going to go to
where the puck is right, and they're all skating toward
(14:05):
high yield active, you know, sort of restructuring the old
mutual funds, wrapping them in an ETF wrapper.
Speaker 1 (14:12):
That really is sort of the.
Speaker 3 (14:13):
Play of the day when it comes to this dimmunity
space right now, and we're seeing sort of that play out,
and the fact they're all crowding into the high yield space,
it means that they still see an opportunity there. What's
going to be interesting to see if the market responds
from an issuing standpoint to sort of keep the lights
on and keep the supply going to feed all these
new projects.
Speaker 2 (14:32):
It's interesting, Joe, one hundred and forty one billion in
this category, twenty three billion active. But active makes up
the majority of the number of ETF So, in other words,
active is a lot of the new launches, a lot
of the supply.
Speaker 1 (14:45):
And we know that active has been coming for fixed
income forever, so that's not surprising, maybe not forever for
the past couple of years. As Hot Sauce goes, I
don't think that that's very spicy, Eric.
Speaker 2 (14:57):
I don't know. I mean hyd I'm not sure it
gets much spicier than that. There's no leveraged Munich and
this is icy as meaning land gets yeah, And I
think that's part of why sometimes we don't look at
it too much, like it never jumps away. That's why
HYD at that time I called the Canary and the
coal mine because it was trading at the deepest discount.
(15:17):
But one thing I thought about this space, Eric, is
this idea of like how to jazz it up a little,
because when Eric talks about and his headlines, it gets
my brain going better than when I look at the
names of the ETFs. For example, how come they don't
come out with hospitals and schools and because.
Speaker 1 (15:35):
In my opinion, this is I'm kind of into those
reality ESG the things I know.
Speaker 2 (15:39):
Yeah, it's like it's like better than ESG because like
I'm gonna invest in this and I literally know it's
going to go to stuff that I like and want
to support, versus ESG where it's like, don't you know,
let's take out this stock even though it's not that
bad whatever. I don't get why they don't want to
play with the names focus on the tangible, yeah, and
do more tangible stuff and thematic. It's weird to they
(16:00):
haven't done much.
Speaker 1 (16:00):
They're like by la, like, yeah, it seems like you
could get behind that.
Speaker 2 (16:04):
Yeah, help with la exactly.
Speaker 3 (16:07):
I don't disagree, but you know, it's interesting. Someone probably
paid a lot of money to come up with these
really snazzy tickers on some of these, and unless you
know exactly what they're doing, you don't get a lot
one of the ones I'll point to and we talk
about hot sauce. I mean, look, I disagree. I think
there is leverage to be had in the UNI ets
space and RTAI is a perfect example of that. Right,
(16:30):
you know, when rates were jumping up, this is one
of the worst performers.
Speaker 2 (16:33):
Rates eased off a bit last year, it.
Speaker 3 (16:35):
Was one of the best performers, and it's one of
the most levered muni ETFs out there. One year returns
almost eleven percent.
Speaker 2 (16:42):
Okay, so this is just so people don't play the
name of it, because I actually didn't know this one
rare view tax advantage incoming to you. Yeah, that name
is boring. I gotta be honest with you. And you're
saying this has leverage in it. Yeah how much? What percent? Right?
Speaker 3 (16:55):
I think it's up here, like thirty to thirty five percent,
just sort of back of the envelope.
Speaker 1 (16:59):
I'd have to double check that.
Speaker 2 (17:00):
Yeah, the yield is five percent. That's pretty especially if
you get an after tax yield of a little more
than that.
Speaker 1 (17:05):
So there is spice.
Speaker 2 (17:06):
Yes, okay, Like I said, it's it's all relative, right,
This is spicy for.
Speaker 1 (17:11):
The ghost pepper of New Zealand.
Speaker 2 (17:14):
Yes, Oh my god, let me look at the volatility here. Yeah.
By the way, the volatility is still half the S
and P. That's spicy over there. Yeah, it's like a
kiddie ride in the equities.
Speaker 1 (17:26):
Yes, okay, Eric, I want to bring this back to
this threat that seems kind of existential. Like if already
it's really hard to care about Muni Land for a
certain investor or, at least one name Joel, and this
taxes emption goes away, how how existential does that make
(17:48):
Uni Land?
Speaker 3 (17:50):
Think about it this way. You know, state and local
governments still need to finance billions of dollars a year
to keep the lights on right, keep things in good repair,
and so if the exemption went away, it just means
they're going to be borrowing in the tax will market
at higher rates. I don't think they're gonna be borrowing
where like Apple or Microsoft issue probably somewhere below that,
(18:10):
but significantly more than they are now. And guess what
they're passing that cost on to you. They're passing that
cost on to mister balchiunis the passing it on to me,
you know? And I think that's the underappreciated point here, right.
We all sort of benefit from that collective subsidy that's
being issued for the top hat and monocle crowd if
we sort of want to go back to that analogy,
(18:30):
but we're all sort of getting something for that as well,
and it's less taxes than it could be. And I
think that's sort of the point to really sort of
head home with those who are making the decisions in Washington.
Speaker 2 (18:42):
Man.
Speaker 1 (18:42):
The lobbying, uh feels like it's going to be very
allowed on this one. It's gonna it's gonna be an
interesting thing to watch, especially at this moment that we've
got a Magna crowd that's taken over uh, you know,
the Republican wing and and you know, something like this
seems like it'll be an interesting topic of cover station
in the year to come. Yeah, Balchinus, any any final thoughts.
Speaker 2 (19:04):
No, I just wanted to kind of ask Eric as
an analyst who sees all these ETFs coming out, because
sometimes he does cover the ETF side of things. Are
there any sort of out of the box ETF besides
RTAI that that sort of stand out to you? Is
is interesting or something that that you might have designed
yourself if you were initire.
Speaker 3 (19:24):
You know one that sort of comes to mind, and
it's selfishly, it's a shameless plug for Masters of the Universe.
It's someone we had on not long ago. You know,
Rockefeller Asset Management, and they have a new fund RMOP
and you know what they're doing is they're getting really
down the weeds on the credit side of things. So
(19:45):
like twenty twenty one percent of their asset allocation is
in charter schools, which is sort of one of the
I would say most esoteric areas of community space, you know,
and then there are other expert as airports. Right, So
I really have a blend of this really niche credit
space and then something everybody's using. And I really sort
(20:05):
of like that approach, right, Eric.
Speaker 1 (20:07):
I've got one final question for you. It's a question
that we often ask on trillions at the end. What
is your favorite ETF ticker?
Speaker 3 (20:15):
My favorite one it has to be hid I mean,
and I only say that because, look, I mean, I
don't want to give them a two heart of a time,
but they were woefully underprepared for COVID, and I think
it really played out in real time. But you know,
I think the thing is it brought so much attention
to the fact that there were high yield muni tfs,
(20:36):
and I feel like that has sort of, you know,
in one way, led to the growth of all these
new products coming online right now.
Speaker 2 (20:42):
And let me say one thing HYD in COVID to
me is the ticker I bring up all the time
Joel to explain that if you put private equity were
private credit in an ETF and it's like fifteen to
twenty percent of the fund, that let's just say that
that person is illiquid, it probably still wouldn't be trading
it the discount that was. In other words, I think
HYD shows that you can have people have a hybrid
(21:07):
closed in fund ETF situation, they'd still prefer that then
going to the mutual fund or interval fund. That's my
theory on this and why it's okay and this will work.
I use HID all the time.
Speaker 3 (21:17):
Yeah, HYD had to suffer so we can have nice
things today.
Speaker 2 (21:21):
Yes, I like that. I may steal that for a headline.
Speaker 1 (21:24):
All right, Eric Kazatski, thanks for making munis not so boring. Yeah,
thanks for having me and for being a guest on Trillions.
Long overdue, we'll have you back. Thanks for listening to
Trillions until next time. You can find us on the
Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, or wherever
(21:47):
else you'd like to listen. We'd love to hear from you.
We're on Twitter. I'm at Joel Webbers Show. He's at
Eric Baultness. This episode of Trillions was produced by Magnus Hendrickson. Bye.
Speaker 2 (22:00):
This is the this is
Welcome to Trillions. I'm Joel Webber and.
Speaker 2 (00:07):
I'm Eric Belchernas.
Speaker 1 (00:13):
There's this theme that we've been talking about for a while, Eric,
and you've been wanting to do it. I've been resisting.
Speaker 2 (00:21):
So I don't know how many episodes we've done.
Speaker 1 (00:23):
Maybe two hundred we should actually count.
Speaker 2 (00:26):
And there's probably only like forty categories of ETFs, meaning
we've covered many categories multiple times that we've never covered
this one because because of me. Yeah, well, and I
understand it is arguably one of the more boring sounding categories.
I mean I was talking about I would put it
right up around short duration bonds.
Speaker 1 (00:48):
Have you done that one?
Speaker 2 (00:49):
We have? Yeah, because money markets, this is municipal bonds.
Speaker 1 (00:53):
Now, hold on, I'm gonna fall asleep.
Speaker 2 (00:56):
Before people tune out here. Listen a couple things for
of all, One of the most red analysts in Bloomberg
Intelligence is Eric Kazatski, my colleague. I've known her for
years and he's very colorful writer too, And people really
use Muni's, especially if you're planning a portfolio for a
(01:18):
real person. The after tax yield on these bonds is great.
I remember interviewing Bogel Jack Bogel and he was a
big Muni guy. He loved Muni's for his portfolio. And
when I look at some of Eric Kazyski's headlines, what
I like about them is they're so tangible. La Fires,
Texas Battleship, JFK Airport, the Hollywood Strike, DeSantis, and Disney.
(01:41):
There are Muni pegs to a lot of stuff that
we love and know. So I think.
Speaker 1 (01:45):
America is built on the municipal bonds.
Speaker 2 (01:47):
It really is. It runs on Muni's basically. So we
are going to try to.
Speaker 1 (01:52):
Get in other words, a long overdue episode.
Speaker 2 (01:54):
We're going to try to make Muni's cool today. Yeah, okay,
that's our that's our time. I'm going to try to
keep you awake, riveted, and Eric will too.
Speaker 1 (02:02):
I'm in, I'm in. Eric has the bigger job, though,
I'm so ready and joining us on this episode. Eric
Kazatski an analyst with Bloomberg Intelligence who's also the co
host to the podcast Masters of the Universe, this time
on Trillions Muni Land. Eric, Welcome to Trillions.
Speaker 3 (02:22):
Hey, I'm happy to be here, and what a setup.
I wasn't sure where that was going at first, but
you guys turned it around at the last minute. Thank you, Eric.
Speaker 1 (02:31):
You know, as baltun is set up here. Long overdue conversation.
So why do investors like municipal bonds?
Speaker 3 (02:40):
I mean it's really simple. Do you like paying taxes?
I don't like paying taxes?
Speaker 1 (02:46):
Okay, So why are they so boring?
Speaker 3 (02:49):
I think because people are confused by them. But look,
at the end of the day, it's the simplest thing
to understand. Right, Hey, Look, you live somewhere.
Speaker 2 (02:57):
Has a school.
Speaker 3 (02:58):
Undoubtedly that school was built with tax exempt bonds. You
have been to a sports game lately, a concert, Undoubtedly
those have been built with tax free bonds. Airports, roads, bridges.
It's just the easy stuff you see every day that
gets ignored the most. That's really what it comes down to.
Speaker 1 (03:14):
Okay, So there's this tax exemption that munieds benefit from.
How does that work and why are they exempt?
Speaker 2 (03:21):
Yeah?
Speaker 3 (03:22):
I mean, well, so it's been tax law for almost
one hundred years. I mean, the market has been around
that long. But essentially, what you do is the issuer
gets a benefit to borrow at a lower rate, and
that's passed on to the buyers of those bonds and
they get to save the interest that comes in as
income from their federal and state taxes. Now, it doesn't
(03:43):
all work the same. Some states have different laws. But
let's just assume that they're all federally in state tax free.
It's just simple for this conversation. So look, it's a
double benefit, right. The issuers get the benefit of borrowing
lower and the investors get the tax free income. It's
really as simple as that.
Speaker 2 (04:00):
Real quick, Okay, let's just bring one up here. The
I shares California Municipal Bond etf CMF is the ticker it.
I have a yield here of two point eight percent.
So what is the because when I when you talk
un these people talk about after tax yield, what would
be the tax equivalent yield? How much more do you
get if you lived than say California.
Speaker 3 (04:21):
It's so you use the role of two here, right,
Just figure in these high tax dates like New York,
New Jersey, California.
Speaker 1 (04:26):
Just double the yield.
Speaker 2 (04:27):
You'll probably get pretty close.
Speaker 3 (04:28):
Because you know, the highest tax back in California, you're
looking at like thirteen point three percent. You add in
federal taxes Medicaid, you're up near fifty percent, So five
point six percent on a taxi equivalent basis.
Speaker 2 (04:41):
That's pretty cool. See that they don't put that in
the data need because that's keeping you do.
Speaker 1 (04:45):
Yeah, Eric, I need you for something else here, which
is why is that taxes in status potentially at risk?
Speaker 3 (04:53):
Well, it really comes down to the returning president. He
has a mandate in his mind to roll out of
the Tax Cuts and Jobs Act. And look, it's going
to cost anywhere three and a half four point six trillion,
I don't know, pick a number, any number, but you
need a way to pay for it. And every election
cycle it comes up that you know, muni bonds are
(05:13):
going to be at risk. And I think it really
comes down to the fact that people assume that those
people who are buying munis are sitting around with top
hats and monocles, just smoking cigars and enjoying all this
tax free income. But if you look at where the
money's going in muni's, I'm sure we're going to touch
on this. It's going to eats, it's going to SMEs.
Speaker 1 (05:31):
And these are.
Speaker 3 (05:32):
Low cost, low dollar fee structures that are attracting people
not in the highest brackets. So you know, that's really
sort of where the risk comes in. It's going to
impact everyone.
Speaker 1 (05:41):
So just to be clear here, nothing is happening yet,
but it's just part of the chatter about the Trump's
tax cuts, which will become a conversation this year since
he's back in the White House and has control of
Congress and those tax cuts are expiring at the end
of the year.
Speaker 3 (05:59):
Right, Yes, So the Houseways and Means put out a
wish list the fifty pages long, and the union exemption
going away was one of the items on there. But
another thing you need to know about people in munialand
we'd love to be part of the current news cycle,
and this is just another way for us to sort
of pop in there.
Speaker 1 (06:15):
Not to be boring and be part of the es. Yeah.
Speaker 2 (06:18):
Yes, actually thing I tell people that all the times,
Like you give me a headline, I'll show you the
ETF PEG and I like that too. Eric, I, well,
let's go to La fires. Explain to me the Munich
connection here, because I saw you had a note that. Again,
his notes do really well readership wise.
Speaker 3 (06:33):
So yeah, so Los Angeles fire is just another instance
of nature just wreaking havoc on our market.
Speaker 1 (06:41):
You know.
Speaker 3 (06:41):
Look, every year you got hurricane damage in Florida. Inevitably,
it's hitting areas where you know, people are paying taxes.
Those taxes support general obligation bonds, you know, hospitals, colleges,
things are impacted by these weather events. And unfortunately California
it really sort of got out of control with this
sort of unseasonal fire that took everyone by surprise. By
(07:01):
the numbers, we sort of calculated that there was potentially
about seventy billion of you know, MUNI sort of tangentially.
Speaker 1 (07:07):
Related projects at risk.
Speaker 3 (07:10):
What it's actually going to shake out to too early
to tell still, you know, but look, the totality of
the damage would certainly call a lot of people by surprise.
Speaker 1 (07:18):
And what does that mean for bondholders?
Speaker 3 (07:21):
You know, hopefully nothing right. We want to be benign
and in the background, and we want to sort of
keep on with the you know adage that there's never
been a true MUNI default from an act of God.
We haven't seen one yet. I don't really think you're
going to see one here. It doesn't mean there's not
going to be litigation that's going to be painful, especially
for LA Department of Water and Power. The Water Department
is already smacked with the lawsuit. Not sure how it's
(07:43):
going to play out, but they could have some liability.
Speaker 2 (07:45):
Right when has there been defaults? What would cause one?
Speaker 3 (07:49):
Well, I mean you have defaults as far as Puerto Rico,
as far as Detroit, you know, and New York back
in the seventies. Right, it really comes down to bad
fiscal management. Bad fiscal management has caused more issues immuniland
then weather and nature related events at this point.
Speaker 2 (08:03):
So do you cover that, Like, do you look at
where maybe the code red situations are, where there's like
total mismanagement of funds. I don't know why I keep
thinking of Illinois, like are they like that?
Speaker 3 (08:15):
Your right to think that. Yeah, Look, we try and
turn on the lights and see where the cockroaches are
running as much as possible. But you know the problem
is these are slow burned things, right, Detroit played out
over years. It wasn't a new issue. Puerto Rico, same thing.
You know, certainly Chicago, Chicago board ed, Illinois. They all
have their problems. The problem is they're able to kick
(08:36):
the can down the road.
Speaker 1 (08:38):
You know.
Speaker 3 (08:38):
We just try and stay on top of it and
tell investors sort of where the risks are.
Speaker 2 (08:43):
So let's talk about practical application. Let's say you have
a munique portion of a portfolio. The two biggest ones
on the market are MUB and vtebs. That's our shares
in Vanguard. Those have like thirty five and forty billion dollars.
They're the studs. Like most categories, it's like the two,
the big two have the top ETF. So should someone
just buy one of those and call it a day,
(09:05):
or like, what does a munich analyst think of those
two sort of big timers.
Speaker 3 (09:11):
It's like vanilla ice cream. It's great, it's a fine flavor,
it's a top seller, but like, you can only have
so much of it, right, Everybody wants some variety, and
that's the beauty of the ETF market is that it's
bringing in a lot of alternative flavors and small boutique
ice cream providers. Let's say you know, MUB and b
TEP are great, right, measured by flows, they are. They're
the biggest creatures, sort of like roaming around Uniland. The
(09:33):
problem is they miss a big portion of the market.
They're passive, which is not a bad thing, but they
don't invest in hospitals, they don't invest in higher ed
they don't invest in bonds that are subject to alternative
minimum tax. We wrote a note earlier in the year
they miss about eighteen percent of the investable market for
unis just based on their sort of stringing criteria, and
(09:54):
unfortunately that eighteen percent makes up a big portion of
returns in every single year. So I think investor are
missing out right.
Speaker 2 (10:08):
I remember back I don't know five six years ago,
MUB was the big category leader by far. Then Vanguard
launched one started climbing the charts VTEB, and I remember
MUB I think was twenty five basis points. Vanguard was
like six or seven, and MUB slashed its fee in
one shot from twenty five to seven. And I thought,
(10:28):
that's why I call it the tyrodome. Jrol. You're the
leader of the category, most volume, most assets, but you
know what's about to happen, and you basically cut off
both legs and an arm. That's it. I've never seen
self cannibalization that great. But there's still number one.
Speaker 1 (10:44):
It worked.
Speaker 2 (10:45):
I mean, had they not done that, I think vteb's
three four times bigger. So that's also something Eric. Just
before we get to the unique ETFs, the MUNI mutual
funds they're all active, right, There really is not a
lot passive there. And here you have two ETFs at
f five basis points each. How much does that factor
into all the money that's rushed here, Given that most
(11:05):
mutual funds are like, you know, eighty basis points to
maybe one point five percent.
Speaker 3 (11:11):
It's factored in a ton When you think about who
the majority of folks are buying this thing, right, you
have a lot of retail people just directly buying. But
it's also part of platform investing.
Speaker 1 (11:21):
Right.
Speaker 3 (11:21):
So if I'm an RIA, I'm charging one percent on
a portfolio, and I can go from let's say, splitting
a thirty basis point fee with a mutual fund and
keeping seventy to keeping ninety five and I have fives
you know for investing in MUB or VTAB. That sounds
much better to me, right, And my clients are probably
like none the worse off as far as exposure. But
(11:42):
I think again, two different styles, right, If you're worried
about performance, you may not want to go dout on
the road. If you're focusing on just acid allocation and fees,
they're certainly the most attractive thing out there.
Speaker 1 (11:56):
Okay, So hot sauce has come for every ETF I
can think of, what does hot sauce in muni bonds
look like?
Speaker 2 (12:04):
So, you know, one thing that was launched very recently
was Spider has target Maturity Muni bonds, So for example
at Spider SSGA MY twenty twenty eight, so that's a
niche version, so that that means all the bonds mature
in that year. That way you can like time your
duration a little bit. We've seen some other things launched
like tax aware muni bonds, a lot of short duration
(12:27):
muni bonds, high yield, I know high yield. Eric was
one that back when COVID happened. Eric and I talked
a lot because there was NTF HYD which is the
van k hig yield muni and this thing traded it
like twenty to thirty percent discounts to NAV. And of
all the bond ETFs, this was the worst in terms
(12:50):
of it obviously held the least liquid stuff that its
price was deviating that much from the NAV, although the
NAV was based on old bond prices, so it was stale.
And it's interesting that ETF, even though it was so,
it turned into a closed then fund essentially it's took
in more assets since then and the volumes the same,
So it seems like people know how to roll with that.
(13:12):
But Eric, what's the liquidity like in this scene? Like,
is a high old MUNI bond etf like something that's
for normal people or is that something that really just
traders should use. No.
Speaker 3 (13:22):
I think there's a lot of liquidity, right. Look, what
happened in the early days of COVID, I feel like
is a complete anomaly, right, And I think the market's
a lot more prepared from a market structure standpoint than
it was in twenty twenty. A lot more things have changed.
So let's say we had a sharp sell off again,
I think the folks who are running hid if I
was them, I would imagine they have a much deeper
(13:45):
ig basket of bonds to throw over the side of
the boat. If there's some sort of like sharp correction
then there was back then, right, just to sort of
like hedge against that. But you know, look, I think
the fact that this market is really sort of like
if you think about it in terms of the the
you know, the fun companies are going to go to
where the puck is right, and they're all skating toward
(14:05):
high yield active, you know, sort of restructuring the old
mutual funds, wrapping them in an ETF wrapper.
Speaker 1 (14:12):
That really is sort of the.
Speaker 3 (14:13):
Play of the day when it comes to this dimmunity
space right now, and we're seeing sort of that play out,
and the fact they're all crowding into the high yield space,
it means that they still see an opportunity there. What's
going to be interesting to see if the market responds
from an issuing standpoint to sort of keep the lights
on and keep the supply going to feed all these
new projects.
Speaker 2 (14:32):
It's interesting, Joe, one hundred and forty one billion in
this category, twenty three billion active. But active makes up
the majority of the number of ETF So, in other words,
active is a lot of the new launches, a lot
of the supply.
Speaker 1 (14:45):
And we know that active has been coming for fixed
income forever, so that's not surprising, maybe not forever for
the past couple of years. As Hot Sauce goes, I
don't think that that's very spicy, Eric.
Speaker 2 (14:57):
I don't know. I mean hyd I'm not sure it
gets much spicier than that. There's no leveraged Munich and
this is icy as meaning land gets yeah, And I
think that's part of why sometimes we don't look at
it too much, like it never jumps away. That's why
HYD at that time I called the Canary and the
coal mine because it was trading at the deepest discount.
(15:17):
But one thing I thought about this space, Eric, is
this idea of like how to jazz it up a little,
because when Eric talks about and his headlines, it gets
my brain going better than when I look at the
names of the ETFs. For example, how come they don't
come out with hospitals and schools and because.
Speaker 1 (15:35):
In my opinion, this is I'm kind of into those
reality ESG the things I know.
Speaker 2 (15:39):
Yeah, it's like it's like better than ESG because like
I'm gonna invest in this and I literally know it's
going to go to stuff that I like and want
to support, versus ESG where it's like, don't you know,
let's take out this stock even though it's not that
bad whatever. I don't get why they don't want to
play with the names focus on the tangible, yeah, and
do more tangible stuff and thematic. It's weird to they
(16:00):
haven't done much.
Speaker 1 (16:00):
They're like by la, like, yeah, it seems like you
could get behind that.
Speaker 2 (16:04):
Yeah, help with la exactly.
Speaker 3 (16:07):
I don't disagree, but you know, it's interesting. Someone probably
paid a lot of money to come up with these
really snazzy tickers on some of these, and unless you
know exactly what they're doing, you don't get a lot
one of the ones I'll point to and we talk
about hot sauce. I mean, look, I disagree. I think
there is leverage to be had in the UNI ets
space and RTAI is a perfect example of that. Right,
(16:30):
you know, when rates were jumping up, this is one
of the worst performers.
Speaker 2 (16:33):
Rates eased off a bit last year, it.
Speaker 3 (16:35):
Was one of the best performers, and it's one of
the most levered muni ETFs out there. One year returns
almost eleven percent.
Speaker 2 (16:42):
Okay, so this is just so people don't play the
name of it, because I actually didn't know this one
rare view tax advantage incoming to you. Yeah, that name
is boring. I gotta be honest with you. And you're
saying this has leverage in it. Yeah how much? What percent? Right?
Speaker 3 (16:55):
I think it's up here, like thirty to thirty five percent,
just sort of back of the envelope.
Speaker 1 (16:59):
I'd have to double check that.
Speaker 2 (17:00):
Yeah, the yield is five percent. That's pretty especially if
you get an after tax yield of a little more
than that.
Speaker 1 (17:05):
So there is spice.
Speaker 2 (17:06):
Yes, okay, Like I said, it's it's all relative, right,
This is spicy for.
Speaker 1 (17:11):
The ghost pepper of New Zealand.
Speaker 2 (17:14):
Yes, Oh my god, let me look at the volatility here. Yeah.
By the way, the volatility is still half the S
and P. That's spicy over there. Yeah, it's like a
kiddie ride in the equities.
Speaker 1 (17:26):
Yes, okay, Eric, I want to bring this back to
this threat that seems kind of existential. Like if already
it's really hard to care about Muni Land for a
certain investor or, at least one name Joel, and this
taxes emption goes away, how how existential does that make
(17:48):
Uni Land?
Speaker 3 (17:50):
Think about it this way. You know, state and local
governments still need to finance billions of dollars a year
to keep the lights on right, keep things in good repair,
and so if the exemption went away, it just means
they're going to be borrowing in the tax will market
at higher rates. I don't think they're gonna be borrowing
where like Apple or Microsoft issue probably somewhere below that,
(18:10):
but significantly more than they are now. And guess what
they're passing that cost on to you. They're passing that
cost on to mister balchiunis the passing it on to me,
you know? And I think that's the underappreciated point here, right.
We all sort of benefit from that collective subsidy that's
being issued for the top hat and monocle crowd if
we sort of want to go back to that analogy,
(18:30):
but we're all sort of getting something for that as well,
and it's less taxes than it could be. And I
think that's sort of the point to really sort of
head home with those who are making the decisions in Washington.
Speaker 2 (18:42):
Man.
Speaker 1 (18:42):
The lobbying, uh feels like it's going to be very
allowed on this one. It's gonna it's gonna be an
interesting thing to watch, especially at this moment that we've
got a Magna crowd that's taken over uh, you know,
the Republican wing and and you know, something like this
seems like it'll be an interesting topic of cover station
in the year to come. Yeah, Balchinus, any any final thoughts.
Speaker 2 (19:04):
No, I just wanted to kind of ask Eric as
an analyst who sees all these ETFs coming out, because
sometimes he does cover the ETF side of things. Are
there any sort of out of the box ETF besides
RTAI that that sort of stand out to you? Is
is interesting or something that that you might have designed
yourself if you were initire.
Speaker 3 (19:24):
You know one that sort of comes to mind, and
it's selfishly, it's a shameless plug for Masters of the Universe.
It's someone we had on not long ago. You know,
Rockefeller Asset Management, and they have a new fund RMOP
and you know what they're doing is they're getting really
down the weeds on the credit side of things. So
(19:45):
like twenty twenty one percent of their asset allocation is
in charter schools, which is sort of one of the
I would say most esoteric areas of community space, you know,
and then there are other expert as airports. Right, So
I really have a blend of this really niche credit
space and then something everybody's using. And I really sort
(20:05):
of like that approach, right, Eric.
Speaker 1 (20:07):
I've got one final question for you. It's a question
that we often ask on trillions at the end. What
is your favorite ETF ticker?
Speaker 3 (20:15):
My favorite one it has to be hid I mean,
and I only say that because, look, I mean, I
don't want to give them a two heart of a time,
but they were woefully underprepared for COVID, and I think
it really played out in real time. But you know,
I think the thing is it brought so much attention
to the fact that there were high yield muni tfs,
(20:36):
and I feel like that has sort of, you know,
in one way, led to the growth of all these
new products coming online right now.
Speaker 2 (20:42):
And let me say one thing HYD in COVID to
me is the ticker I bring up all the time
Joel to explain that if you put private equity were
private credit in an ETF and it's like fifteen to
twenty percent of the fund, that let's just say that
that person is illiquid, it probably still wouldn't be trading
it the discount that was. In other words, I think
HYD shows that you can have people have a hybrid
(21:07):
closed in fund ETF situation, they'd still prefer that then
going to the mutual fund or interval fund. That's my
theory on this and why it's okay and this will work.
I use HID all the time.
Speaker 3 (21:17):
Yeah, HYD had to suffer so we can have nice
things today.
Speaker 2 (21:21):
Yes, I like that. I may steal that for a headline.
Speaker 1 (21:24):
All right, Eric Kazatski, thanks for making munis not so boring. Yeah,
thanks for having me and for being a guest on Trillions.
Long overdue, we'll have you back. Thanks for listening to
Trillions until next time. You can find us on the
Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, or wherever
(21:47):
else you'd like to listen. We'd love to hear from you.
We're on Twitter. I'm at Joel Webbers Show. He's at
Eric Baultness. This episode of Trillions was produced by Magnus Hendrickson. Bye.
Speaker 2 (22:00):
This is the this is
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