John R. Mousseau quoted in…

Underwriting spreads inched up in first half

By Christine Albano – The Bond Buyer – August 21, 2023



Excerpt follows:


Looking back, spreads fell below $4 for all bonds back in the first half of 2022, the first time in nearly 20 years, compared with 2003 when spreads were at $5.20, according to historical data from Refinitiv.


The gross underwriting spread only piqued higher than $5.20 once back in 2009 when it hit a one-year blip of $6.21, according to the data.


Current market and state budgetary conditions could be the reason behind the slight bump in spreads so far in the first half of 2023, according to John R. Mousseau, president and chief executive officer and director of fixed income at Cumberland Advisors.


"I think that some of the increase in spread is that — though issuance is down year over year — looking forward the market sees some of the surpluses that were so prevalent in state and local governments starting to melt away," Mousseau explained, pointing to the state of California's budget as an example.


"I would fully expect that state and local governments will need more financing going forward, even if at somewhat lower rates as inflation comes down," he said. "So, the overall risk profile probably increases as you go further into the future."


Anecdotal signs, according to Mousseau, include increased delinquency on car loans, increases in installment debt, higher mortgage rates impinging housing, and the vast overhand of commercial real estate with high vacancies in many big cities.  


"So, spreads could increase because the risk profile is increasing," Mousseau said.


Others, like Dan Solender, partner and director of tax-free fixed income at Lord Abbett, believe that the imbalance of negotiated compared to competitive supply and refunding compared to new issue volume are factors in the spread widening in the first half, albeit small.



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John R. Mousseau
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The Bond Buyer