skip navigation

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

23 June 2020

Weekly Municipal Monitor—Exploring the Infrastructure Proposals

By Sam Weitzman, Robert E. Amodeo

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

Municipal market yields moved modestly higher amid heavy new-issue volume. We continue to see an appetite for tax-exempt yield, as municipal mutual funds recorded a sixth consecutive week of inflows, further paring year-to-date (YTD) outflows. This week in munis, we explore the potential implications associated with infrastructure proposals currently circulating around Washington.

The Muni Market Posted Modestly Positive Returns

AAA municipal yields moved 2-3 bps higher across the curve this week, underperforming a relatively unchanged Treasury market. Municipal/Treasury ratios have stabilized following a few months of volatility, remaining range-bound between 110% and 125%, which is still above longer term averages. The Bloomberg Barclays Municipal Index returned 0.06%, while the HY Muni Index returned 0.23%

Technicals Softened as Heavy Issuance Mostly Offset Strong Inflows

Municipal mutual funds reported $1.7 billion of inflows, a sixth consecutive week of inflows, according to Lipper. Long-term funds recorded $990 million of inflows, high-yield funds recorded $148 million of inflows and intermediate funds recorded $122 million of inflows. Municipal fund net outflows now total $9.8 billion YTD.

The muni market recorded $15.9 billion of new-issue volume last week, up 45% from the prior week. YTD issuance of $189 billion is 8% above last year’s pace, primarily driven by taxable supply, which remains approximately 2.9x over last year’s levels, while tax-exempt supply is down 10% year-over-year. We anticipate approximately $7 billion in new issuance this week, led by $1.1 billion Massachusetts GO bonds and $281 million in taxable state of Wisconsin transactions.

Exhibit 1: Municipal Supply
Explore Municipal Supply.
Source: Bond Buyer. As of 31 Dec 19. Select the image to expand the view.

This Week in Munis: Infrastructure Proposals Could Directly Impact the Tax-Exempt and Taxable Muni Market

On Thursday, June 18, House Democrats pitched a $1.5 trillion infrastructure plan, and scheduled a vote ahead of the July 4 recess. The Trump administration has separately discussed a $1 trillion infrastructure measure. Neither side has disclosed how an infrastructure package would be funded, but the House Ways and Means Chairman proposed floating new bond measures, including a permanent reinstatement of Build America Bonds (BABs).

As a reminder, following the great financial crisis (GFC) in 2009, the Obama administration introduced BABs, which provided municipal issuers federal subsidies to issue $181 billion of taxable municipal debt in 2009 and 2010. A bipartisan agreement on infrastructure, and any reinstitution of BABs, would have direct implications on both the taxable and tax-exempt municipal market. As municipalities were incentivized to issue taxable municipal debt in 2009 and 2010, tax-exempt issuance fell 20%. Due to increased global awareness of taxable muni debt, we could see an even higher cannibalization of tax-exempt debt with a permanent reinstatement of BABs, particularly given very low Treasury rates.

The prospect of lower tax-exempt supply serves as another positive technical factor to the tax-exempt market that has faced declining net new issuance. Meanwhile, the measure would likely accelerate already growing taxable supply levels, potentially offering value to global investors faced with low (to negative) global government rates.

Exhibit 2: Municipal Bond Yields and Index Returns
Explore Municipal Bond Yields and Index Returns.
Source: (A) Muni Yields: Thomson Reuters MMD; Treasury Yields: Bloomberg.
As of 19 June 20. (B) Bloomberg. As of 19 June 20. Select the image to expand the view.
Exhibit 3: Tax-Exempt and Taxable Municipal Valuations
Explore Tax-Exempt and Taxable Municipal Valuations.
Source: (A) Bloomberg, Western Asset. AAA, AA, A, BBB Corporate Indices. As of 19 June 20.
(B) Bloomberg, Western Asset, Taxable Muni Index Corporate comparable used is the Long Corporate (ex. BBB) to better align credit quality and duration. As of 19 June 20. 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.