skip navigation

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

20 July 2021

Weekly Municipal Monitor—Health Care Headlining Sector Performance

By Fred Poon

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

Municipals Posted Positive Returns Last Week

The AAA muni yield curve steepened during the week, moving 1 bp lower in 5-years and 2 bps higher in 30-years. US munis underperformed the Treasury rally, sending Municipal/Treasury ratios 3% higher in both 10- and 30-years. The Bloomberg Barclays Municipal Index returned 0.04%, while the HY Muni Index returned 0.10%. This week, we highlight the improvement in the health care sector this year.

Technicals Continue to Drive Outperformance

Fund Flows: During the week ending July 14, municipal mutual funds recorded $2.2 billion of net inflows. Long-term funds recorded $1.6 billion of inflows, high-yield funds recorded $654 million of inflows and intermediate funds recorded $263 million of inflows. Municipal mutual funds have now recorded inflows 60 of the last 61 weeks, extending the record inflow cycle $128 billion, with year-to-date (YTD) net inflows also maintaining a record pace of $66 billion.

Supply: The muni market recorded $11 billion of new-issue volume during the week (+154% week-over-week). Total issuance YTD of $242 billion is 13% higher from last year’s levels, with tax-exempt issuance trending 19% higher year-over-year (YoY) and taxable issuance trending 2% lower YoY. This week’s new-issue calendar is expected to decline modestly to $10 billion of new issuance. The largest deals include $839 million Salt Lake City International Airport and $660 million State of Oregon Education District transactions.

This Week in Munis: Health Care Headlining Sector Performance

The health care sector has been a top performing investment-grade municipal sector YTD. Through July 14, the sector returned 2.99%, outperforming the Bloomberg Barclays Municipal Bond Index by 221 bps and leading all investment-grade municipal sectors. The relatively higher yielding sector has benefited from an appetite for yield amid the unrelenting positive technical factors observed in the municipal marketplace, and constructive recent developments have also strengthened fundamental prospects for the sector.

As the vaccine rollout has limited the spread of the COVID-19 virus, health care utilization has steadily improved. Hospitals have reported rising patient volumes, including non-emergency procedures. While most hospitals did not receive support from the most recent American Rescue Plan, the sector largely benefited indirectly from the federal expansion of coverage options for the uninsured, scaling up vaccine distribution and increased funding for Covid- and PPE-related supplies.

Exhibit 1: Index Return YTD
Explore Index Return YTD
Source: Bloomberg. As of 16 Jul 21. Select the image to expand the view.

Looking forward, we expect that an ongoing labor recovery will continue to taper uninsured volume and contribute to more profitable commercial volumes. Federal and local policy initiatives focused on expanding Medicaid coverage could also further contribute to health care fundamentals. President Biden has proposed a Federal Public Option as an insurance alternative for states that have not expanded Medicaid eligibility. Just this month, Oklahoma became the latest state to adopt Medicaid expansion. Legislators in Texas are also exploring a path to expand Medicaid at the local level.

With health care spread levels tighter now than in recent history we continue to be selective on health care credit, and are monitoring the potential impact of easing of restrictions that could lead to an uptick in Covid exposure. While patient volumes have improved, we do not expect a full retracement to pre-pandemic levels until public confidence on the safety of health care facilities has been restored.

Exhibit 2: Municipal Bond Yields and Index Return
Explore Municipal Bond Yields and Index Return
Source: Bloomberg. As of 16 Jul 21. Select the image to expand the view.
Exhibit 3: Tax-Exempt Muni Valuations
Explore Tax-Exempt Muni Valuations
Source: Bloomberg. As of 16 Jul 21. 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.