Municipal debt market following Barrington firm's lead

The tax-exempt municipal debt market may become "almost unrecognizable" within two years as the growth of Build America Bonds attracts competition from firms with expertise in selling to investors in taxable securities, according to Chris Mier of Loop Capital Markets LLC.

The industry will evolve as firms that traditionally trade taxable securities follow the lead of Barrington-based Arbor Research and Trading Inc., said Mier, a municipal strategist and managing director of Chicago-based Loop Capital Markets. Arbor, a fixed-income brokerage firm, earlier this year started a municipal group after saying it was inundated with client inquiries about Build Americas.

The bonds "have a couple of great features" that attract "foreign life-insurance companies, multinational banks, and in theory, possibly foreign central banks," said Mier today in an interview. Firms are "understandably eager to use their client base to compete with traditional tax-exempt underwriters," he wrote in a note today.

About $107.5 billion of the debt has been sold since the program began in April 2009. Legislation to extend the program, which provides a 35 percent federal subsidy to the issuer, is currently a part of the so-called jobs bill the House of Representatives may vote on as soon as tomorrow.

"A melding of municipal people and taxable people and you could start to see a taxable mentality or culture applied to the muni world," Mier said. "A lot of it is good -- new ways to do things and value things."

That new culture may include shorting and hedging techniques applied to Build Americas in the same way as a corporate bond or Treasury, Mier said. It may also mean further consolidation of established municipal institutions as firms like Citigroup Inc. or JPMorgan Chase & Co. merge tax-exempt and taxable sales into a single department, he wrote in a report on the subject today.

"The impact of taxable participants on the market is here to stay," Mier said.