Volatility to Continue to Set the Tone for Public Sector Entities

For the public finance sector, the economic backdrop that set the stage earlier in the year has not changed much – and it’s not likely to do so over the next few months.

“As we look at where we are, through the lens of where we thought we would be at the start of the year, the public finance space is still dealing with many of the same issues, with one of the main ones being ongoing volatility,” said Rob Dailey, head of PNC Public Finance. “Because of the environment, it remains particularly important for institutions to be disciplined in how they bring a transaction to market, whether the bond market or bank market. It’s important that organizations pay close attention to all the variables and stay nimble, and this is likely to remain especially important for a longer period of time than we may have anticipated.”

A Stubborn Inverted Yield Curve

As the Federal Reserve continues its battle to curb inflation, it has yet to signal when it will lower interest rates, contrary to many expectations at the start of the year. This has resulted in a prolonged inverted yield curve, and while it may show signs of flattening in the year, in PNC’s view it is not likely to a achieve a more positive slope until 2025. When it does normalize and short-term rates are again lower than long-term rates, this will create opportunities for organizations to optimize their exposure to interest rates and save money. Borrowers and investors have the opportunity now to plan for when that happens, in terms of thinking about when to schedule debt payments, at what point on the curve to invest, and the role of floating rate exposure.

Liquidity Challenges in the Bond Market

There are a number of factors creating pressure on liquidity in the bond market, including the withdrawal of several significant dealers from the market earlier this year and tighter federal regulation for bond broker dealers of municipal bonds. That said, the market has performed well as issuance has increased, now running approximately 25% higher than last year. The municipal bond market is increasingly aligning with the processes and standards of the larger taxable markets, and the immediate effect is that many investors value larger bond issues and maturities more highly due to greater liquidity, which may drive structuring decisions for issuers. Issuers may need to place greater emphasis on liquidity upon issuance and focus on the size of deals in the primary market and size of individual maturities upon issuance in the secondary market. The current environment also reinforces the importance of working with a reliable bank that can help with quality deal execution.

Financing for Government Entities

Over the past two years or so, the need for financing for government entities in the public finance space has slowed somewhat, due largely to the amount of funds available in the economy through federal stimulus. We are seeing the effect of this beginning to recede, and we expect the trend to build through the latter half of this year. Given that some federal government support will remain available through 2026, this will likely be a longer-term dynamic that plays out over the course of a couple of years. As federal support for infrastructure subsides, government entities will need to turn to other solutions to provide their own financing.

Cybersecurity Risk

Volatility is not limited to the financial markets. In addition to contending with risk and uncertainty stemming from a number of fronts, including the actions of the Fed, geopolitical tensions, and impacts from the upcoming presidential election, it’s important for organizations not to lose sight of another type of threat that is closer to home: cybersecurity and fraud. Public sector entities remain a target for cybersecurity breaches by both networks of cyber criminals and nation state actors, capable of evading detection and staging extremely sophisticated attacks. Given the magnitude of the threat, it is more important than ever to both shore up vulnerabilities and proactively address cybersecurity risk. This requires informed decisioning and preparation for resilience and reconstitution in the face of a bevy of possible scenarios.

Ready to Help

PNC Public Finance is committed to serving the financial needs of public sector entities of all types and sizes. Reach out to your Relationship Manager to learn more, or contact us.

Additional Disclosure:

FINRA BrokerCheck

Check the background of PNC Capital Markets LLC on FINRA's BrokerCheck.
Learn More »

Schedule an appointment

SCHEDULE NOW

Find a branch near you

FIND NOW

Important Legal Disclosures and Information

Municipal Advisor and G-17 Disclosure

PNC Capital Markets LLC (“PNCCM”) is providing the information contained in this document for discussion purposes only in anticipation of serving as an underwriter to the person to whom this document is addressed. The information provided herein is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934, as amended (“Exchange Act”), unless such information is provided (i) within the scope of an underwriting of an issuance of municipal securities for which PNCCM is acting or seeking to act as underwriter, (ii) to a person that is separately advised by an independent registered municipal advisor, pursuant to the requirements of Exchange Act Rule 15Ba1-1(d)(3)(vi), or (iii) in response to a written or oral request for proposals or qualifications. PNCCM is not acting as a municipal advisor, and is not subject to the fiduciary duty established in Section 15B(c)(1) of the Exchange Act, with respect to this communication or any related municipal financial product or issuance of municipal securities. PNCCM is not recommending any action to any municipal entity or obligated person and such entity should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the municipal entity or obligated person deems appropriate before acting on this information or material.

The following disclosures are required by Municipal Securities Rulemaking Board (“MSRB”) Rule G-17, as PNCCM proposes to serve as an underwriter, and not as a financial advisor, municipal advisor or fiduciary to any person or entity, in connection with the issuance and sale of securities for the person to whom this is addressed:

(i) MSRB Rule G-17 requires an underwriter to deal fairly at all times with all persons, including both municipal issuers and investors.

(ii) An underwriter’s primary role is to purchase securities with a view to distribution in an arm’s-length commercial transaction with an issuer; and an underwriter has financial and other interests that differ from those of such an issuer.

(iii) Unlike a municipal advisor, an underwriter does not have a fiduciary duty to an issuer under the federal securities laws and is, therefore, not required by federal law to act in the best interests of that issuer without regard to its own financial or other interests.

(iv) An underwriter has a duty to purchase securities from an issuer at a fair and reasonable price, but must balance that duty with its duty to sell those securities to investors at prices that are fair and reasonable.

(v) The issuer may choose to engage the services of a municipal advisor with a fiduciary obligation to represent the issuer’s interest in the transaction

(vi) An underwriter will review the official statement, if any, for those securities in accordance with, and as part of, its responsibilities to investors under the federal securities laws, as applied to the facts and circumstances of the transaction.

Standard Disclosure

PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. (“PNC”) and affiliate of PNC Bank, National Association (“PNC Bank”). PNCCM is not a bank or thrift, but rather, it is a separate and distinct corporate entity from its bank affiliate.

This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written permission of PNCCM. The information contained herein is based on information PNCCM believes to be reliable and accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such. Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions expressed herein are subject to change without notice.

PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by PNC through its subsidiaries PNC Bank and PNCCM. Securities underwriting, sales and trading services are provided by PNCCM. Foreign exchange and derivative products are obligations of PNC Bank, National Association.

PNC Capital Markets Disclosure

Important Investor Information – Securities, insurance, foreign exchange, and derivative products are:
Not FDIC Insured • Not Bank Guaranteed • Not A Deposit
• Not Insured By Any Federal Government Agency • May Lose Value

Swap Dealer Disclosure

“PNC” is a registered mark of The PNC Financial Services Group, Inc.

PNC General Disclosure