skip navigation

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

15 September 2020

Weekly Municipal Monitor—No Deal

By Robert E. Amodeo, Dave Fare

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

Municipal Yields Ticked Modestly Higher in Intermediate and Long Maturities

AAA Municipal yields were mixed across the curve, underperforming Treasuries, as index returns grinded higher. The Senate failed to advance through Congress its stimulus bill, which provided limited support for municipalities. The Bloomberg Barclays Municipal Index returned 0.05%, while the HY Muni Index returned 0.06%

Technicals: Demand for Munis Persists Amid an Elevated Calendar

Fund Flows: During the week ending September 9, municipal mutual funds reported an 18th consecutive week of inflows at $1.0 billion, according to Lipper. Long-term funds recorded $323 million of inflows, intermediate funds recorded $161 million of inflows, while high-yield funds recorded $88 million of outflows. Municipal mutual fund net inflows YTD total $19.2 billion.

Supply: The muni market recorded $8.4 billion of new-issue volume last week, down 37% from the prior week but remaining relatively elevated considering the holiday-shortened week. Issuance of $311 billion YTD is 28% above last year’s pace, primarily driven by taxable issuance which is up over 264% from last year’s levels. We anticipate approximately $10 billion in new issuance this week (+43% week-over-week). The largest deals include $1.1 billion New York City TFA and $835 million taxable Houston Airport transactions.

The Week in Munis: No Deal

Last week, the Senate voted 52-47 to advance its stimulus bill, failing to achieve the 60 votes required for progression through Congress. Sized at an estimated $500-$700 billion, the bill fell well short of the $2.2 trillion Democratic proposal, and the Democrats were unanimous in opposition.

The Senate’s failed proposal sought to target unemployment benefits and extend aid for small businesses. The proposal provided limited benefit for states and local governments facing massive revenue shortfalls as a result of COVID-19, providing just $105 billion for schools. By contrast, the prior proposal from the Democrats sought to direct $1 trillion of direct aid toward state and local governments. The Democrats’ proposal was met with resistance by the Republican senate majority and President Trump, who considered the package as a bailout of prior poor budgetary practices.

We continue to expect the majority of states and local governments will maintain adequate budgetary flexibility needed to weather revenue challenges associated with COVID-19. However, we believe an increasing prospect of very limited to zero aid to municipalities will result in budget gaps and austerity measures that will lead downgrades to outpace upgrades in the coming quarters. We continue to favor revenue-backed entities with the income diversity and underlying liquidity characteristics to weather the current economic climate, while remaining cautious on downstream entities reliant on state aid that could potentially be compromised during a prolonged period of austerity.

Exhibit 1: Municipal Bond Yields and Index Returns
Explore Municipal Bond Yields and Index Returns.
Sources: (A) Muni yields: Thomson Reuters MMD; Treasury Yields: Bloomberg. As of 11 Sep 20.
(B) Bloomberg. As of 11 Sep 20. Select the image to expand the view.
Exhibit 2: Tax-Exempt and Taxable Municipal Valuations
Explore Tax-Exempt and Taxable Municipal Valuations.
Source: (A) Bloomberg, Western Asset. AAA, AA, A, BBB Corporate Indices. After-tax yield assumes a top effective tax rate of 40.8%. As of 11 Sep 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 11 Sep 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.