skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

MARKETS
March 23, 2021

Weekly Municipal Monitor—Munis Wagering on March Madness

By Fred Poon
Download the Article

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Municipal Yields Moved Higher, Catching Up to the Recent Treasury Selloff

US municipal yields moved higher across the curve, with AAA municipal yields moving 14 bps higher. Municipals underperformed Treasuries following recent weeks of outperformance. Fund flows remained positive amid elevated issuance. The Bloomberg Barclays Municipal Index returned -0.51%, while the HY Muni Index returned -0.39%. This week, as March Madness kicks off, we take a look at states’ sports gambling expansions.

Fund Flows Remained Positive Amid Elevated Supply

Fund Flows: During the week ending March 17, municipal mutual funds recorded $1.3 billion of net inflows. Long-term funds recorded $1.2 billion of inflows, high-yield funds recorded $650 million of inflows and intermediate funds recorded $112 million of inflows. Year-to-date (YTD) net inflows stand at $30.5 billion.

Supply: The muni market recorded $11.9 billion of new-issue volume during the week, up 18% from the prior week. Total issuance YTD of $91.2 billion is up 5% from last year’s levels, but tax-exempt issuance is up just 1% while taxable issuance is 17% higher. This week’s new-issue calendar is expected to remain elevated at $9.7 billion. The largest deals include $1.0 billion New York City Transitional Finance Authority and $695 million State Public Works Board of the state of California transactions.

This Week in Munis: Munis Wagering on March Madness

States have been rapidly expanding into sports gambling since 2018 when the Supreme Court overturned the Professional and Amateur Sports Protection Act, the law that banned sports betting nationwide except in Nevada. Sports betting is now legal in 26 states and Washington, DC, and 18 other states have introduced sports betting bills.

The pace of expansion is not surprising considering the money at stake. Sportsbooks are relatively simple to establish and represent a source of new employment. In addition, significant gambling activities were already present but untaxed across the country. Prior to 2018, Americans wagered an estimated $150 billion through local bookies and offshore operators, and the American Gaming Association estimated that $10 billion was wagered on NCAA March Madness in 2018, with just a miniscule 3% of wagers made lawfully.

We believe tax revenues received from sports gambling should help support states’ minor budget issues and target select education and infrastructure programs. However, the tax revenues should not be considered a panacea for states’ larger, structural challenges. Illinois launched its online gambling operations in June 2020, and in the first six-month period had collected over $20 million in gambling tax revenues. That figure is expected to grow to $70 million annually, but would still only represent just 0.2% of the state’s total tax revenues. In 2020, New Jersey recorded the highest sports betting handle of any state, garnering $65 million in tax collections, which also represented just 0.2% of the state’s tax revenues that year.

Optimistic future revenue collections should also be tempered by more competition. New York is taking note of its neighbor’s success and appears open to the idea of statewide online wagering. While every dollar counts for some issuers facing short-term headwinds, potential longer-term social costs will also be considered to assess whether this gamble really pays off for states.

Exhibit 1: Municipal Bond Yields and Index Return
Explore Municipal Bond Yields and Index Return.
Sources: (A) Muni yields: Thomson Reuters MMD; Treasury Yields: Bloomberg. As of 19 Mar 21.
(B) Bloomberg. As of 19 Mar 21. Select the image to expand the view.
Exhibit 2: Tax-Exempt and Taxable Municipal Valuation
Explore Tax-Exempt and Taxable Municipal Valuation.
Sources: (A) Bloomberg, Western Asset. AAA, AA, A, BBB Corporate Indices. After-tax yield assumes a top effective tax rate of 40.8%. As of 19 Mar 21.
(B) Bloomberg, Western Asset; Taxable Muni Index Corporate comparable used is the long corporate (ex. BBB) to better align credit quality and duration. Select the image to expand the view.
© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.