In December, Citigroup made what for decades would have been an unthinkable announcement. It was closing its municipal bond underwriting and trading business, one of the most prominent in the $4 trillion market.
The shuttering currently underway is part of Citi’s restructuring, which has already eliminated 20,000 jobs. Citi was a go-to partner for local governments seeking advice and help raising debt capital, and its trading operation was one of the biggest. UBS also exited the muni market in 2023, but Citi’s absence will create a more significant void.
Who will fill that space is uncertain. But James Morris, senior vice president at Investortools, a popular software suite in the muni market, has some expectations. Morris is a fixture in the market and his perspective includes more than 20 years of working with broker-dealers and institutional investors active in munis.
At least some of the more than 50,000 muni issuers are going to miss Citi’s underwriting and no single firm is going to replace it. Morris expects the other major underwriters, including Bank of America, RBC, and Jefferies — all which underwrite tens of billions of muni bonds in a year — are going to get most of the business Citi is leaving behind. A team of Citi bankers left to join Jefferies last year, but it’s hard to know right now who the biggest beneficiaries will be, Morris said.
Smaller underwriters will also get a slice of Citi’s business. Underwriting expertise in a sector is paramount to borrowers, but relationships drive the business and some municipalities are drawn to smaller, local banks, Morris said.
“The regional and super-regionals have a prime opportunity to show their support for the markets, and market segments in which they are present and for segments and locations where they seek to expand by adding talent from those stepping away from the business,” said Gregg Bienstock, senior vice president and head of the municipal market group at SOLVE, a fixed-income market data provider.
Tony Tanner, a portfolio manager at the Aquila Group of Funds, a $2 billion manager with single-state municipal bond funds, believes the market is well positioned to absorb Citi's underwriting business. Even the worst muni market of the past 40 years and record trading volume in 2022 didn't disrupt the ecosystem. "I don’t expect there to be meaningful implications for the ability of issuers to find investors for their bond deals or to impede their access to the capital markets," Tanner said.
Citi was also a distinct market maker. As the cost to hold bonds on their books grew, many banks shrunk their balance sheets over the past decade. But until recent years, Citi was a holdout and often held more than $2 billion of muni bonds, making it an important liquidity provider.
“I know that the clients that I was working with to connect with them were definitely benefiting from the size and depth of the balance sheet that Citi was bringing to the market,” Morris said.
In addition to the typical blocks of bonds worth more than $1 million, Citi also used its balance sheet and electronic trading capabilities — something not all broker-dealers have in the muni market — to provide better liquidity to odd lots. The bank played a significant role in the relatively small amount of algorithmic trading happening in the market, so the investors doing that electronic buying and selling could feel a change in liquidity more than other investors, according to Morris.
Morris doesn’t anticipate the change in liquidity will have a massive impact on the market or most participants. But he does wonder what will happen in times of stress, when huge market events lead to price volatility and a surge in the number of trades.
“It'll be interesting to see what happens next time there's stress. They were bidding on a lot of bonds that are out there... and being providers of liquidity in those odd lot scenarios. But I don't see another shop suddenly coming in with another $2 billion to provide that volume of liquidity," said Morris. He explained that most banks aren't going to build bond inventory, but instead will focus on distribution.
To Morris, Citi’s electronic trading appeared to be successful, with the bank pushing the muni market toward a more digital era. Its departure might slow the progress, but asset managers say the digitization will continue regardless.
"This area is growing with or without Citigroup’s presence. Bonds on any dealer’s balance sheet, in my opinion, don’t create liquidity in a deep or sustainable manner, said John Miller, head and chief investment officer of the high yield municipal credit team at First Eagle Investments. "In my view, dealers will step into the market and purchase bonds at price levels that they believe they can resell in a fairly rapid manner. Therefore, dealer bids for blocks of bonds are mostly reflective of fundamental underlying demand driven by the value of the asset class to individual investors and institutional investors. Dealers are effective in translating and transmitting that demand at prices which fluctuate with market conditions, but they don’t create the demand or alter market conditions by themselves."
But Morris stressed that Citi's absence could make way for other broker-dealers interested in holding more bonds and engaging more partners in the market digitally.
“The other side of that is there absolutely is opportunity for these other dealers who... didn't have the same level of balance sheet or... technological savvy,” Morris said. “Maybe there's an opportunity for them with Citigroup’s departure.”
