skip navigation

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

20 September 2022
Weekly Municipal Monitor—Second-Quarter Revenues Remain Resilient
By Sam Weitzman

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

Municipals Posted Negative Returns

Municipals posted negative returns last week amid continued rate volatility. Municipal performance versus Treasuries was mixed across the curve, as ratios remained steady. High-grade municipal yields moved 11-18 bps across the curve as market technicals weakened amid increasing fund outflows and supply conditions. The Bloomberg Municipal Index returned -0.69% while the HY Muni Index returned -1.19%. This week, we highlight second-quarter state and local tax revenue collections.

Technicals Remain Challenged Amid Ongoing Mutual Fund Outflows

Fund Flows: During the week ending September 14, weekly reporting municipal mutual funds recorded $1.4 billion of net outflows, according to Lipper. Long-term funds recorded $594 million of outflows, high-yield funds recorded $267 million of outflows and intermediate funds recorded $312 million of outflows. The week’s outflows mark the sixth consecutive week of outflows and extend year-to-date (YTD) outflows to $86 billion.

Supply: The muni market recorded $8.9 billion of new-issue volume, up 32% from the prior week. Total YTD issuance of $285 billion is 9% lower than last year’s levels, with tax-exempt issuance trending 2% higher year-over-year (YoY) and taxable issuance trending 44% lower YoY. This week’s new-issue calendar is expected to decline to $2 billion. Larger deals include $549 million San Diego Unified School District and $120 million Louisville And Jefferson County Water and Sewer transactions.

This Week in Munis: Second-Quarter Revenues Remain Resilient

Earlier this month, the Census released state and local tax revenue collections for the second quarter of 2022. Second-quarter state and local tax collections continue to highlight strong YoY growth, up 11% from the prior year to $532 billion. Individual income tax collections increased 12% to $203 billion, corporate income tax collections increased 29% to $55 billion, property tax collections increased 6% YoY to $124 billion and sales tax collections increased 7% to $150 billion.

2Q22 tax collection data also reflects the end of fiscal-year 2022 for many municipalities, and trailing 12-month collections were consistent with the YoY growth trends we’ve observed in the second quarter. 12-month trailing total state and local tax collections increased 10% from the 12 months through June 2021 to $2.0 trillion. Within this figure, trailing 12-month individual income tax collections increased 9% to $611 billion, corporate income tax collections increased 41% to $144 billion and sales tax collections increased 12% to $534 billion.

Exhibit 1: 12-Month Trailing State and Local Revenue Collections
Explore 12-Month Trailing State and Local Revenue Collections
Source: Western Asset, Census. As of 09 Sep 22. Select the image to expand the view.

At the state level, total tax collections increased 11% from 2Q21 to $449 billion in 2Q22. The largest components of state tax collections, individual income tax collections (42% of total state collections) and sales tax receipts (27% of total tax collections), were 12% and 26% higher YoY, respectively. Inflationary pressures have contributed to strong YoY growth in 12-month trailing sales tax receipts. Hawaii (+29%), South Carolina (+29%), North Dakota (+28%) and Florida (+27%) observed particularly high growth rates in sales taxes. Florida was a particular beneficiary of this growth considering the lack of state income tax, and higher reliance on sales tax revenues.

Exhibit 2: YoY Change in 12-month Trailing Sales Tax Collections
Explore YoY Change in 12-month Trailing Sales Tax Collections
Source: Western Asset, Census. As of 09 Sep 22. *Does not collect general sales taxes. Select the image to expand the view.

While a tight labor market, strong consumer and recent inflation have all supported muni income and sales tax collections, we remain cautious on the potential for revenues to slow, considering inflationary and interest-rate headwinds that could challenge overall economic growth. Despite the recent market volatility observed this year, relatively tight credit spreads continue to indicate that the fundamental revenue improvement has been largely priced into market valuations. Western Asset believes muni investors are better compensated on a risk-adjusted basis in higher-quality securities, and that incremental value can be better exploited in structural factors.

Exhibit 3: Municipal Bond Yields and Index Returns
Explore Municipal Bond Yields and Index Returns
Source: Bloomberg. As of 16 Sep 22. Select the image to expand the view.
Exhibit 4: Tax-Exempt and Taxable Muni Valuations
Explore Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg. As of 16 Sep 22. 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.