skip navigation

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

19 December 2023

Weekly Municipal Monitor—State and Local Revenues Stabilize

By Sam Weitzman

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

Municipals Rallied With Treasuries Last Week

The muni rally continued last week, with munis trailing Treasuries lower as inflation data continued to trend downward due to the Fed’s dot plot signaling three rate cuts for next year. Meanwhile, high-grade muni yields moved 14-18 bps lower across the curve and muni technicals weakened amid tax-loss selling. The Bloomberg Municipal Index returned 1.15% during the week, the High Yield Muni Index returned 1.81% and the Taxable Muni Index returned 2.72%. This week we highlight 3Q23 state and local revenue estimates released by the Census last week.

Fund Flows Remained Challenged Amid Tax-Loss Season

Fund Flows: During the week ending December 13, weekly reporting municipal mutual funds recorded $524 million of net outflows, according to Lipper. Long-term funds recorded $228 million of outflows, high-yield funds recorded $58 million of outflows and intermediate funds recorded $25 million of inflows. This week’s flows bring year-to-date (YTD) net outflows to an estimated $16 billion.

Supply: The muni market recorded $7 billion of new-issue volume last week, down 45% from the prior week. YTD issuance of $363 billion is 2% higher from last year’s level, with tax-exempt issuance 8% higher and taxable issuance 34% lower year-over-year (YoY). This week’s calendar is expected to drop ahead of the holidays to $2.7 billion. Largest transaction includes a $725 million Main Street Natural Gas and $343 million California Public Finance Authority (Sharp Healthcare) transactions.

This Week in Munis: State and Local Revenues Stabilize

Last week the Census released 3Q23 state and local revenue estimates, which highlighted continued tax-collection strength. Following two consecutive quarters of YoY declines, third quarter state and local tax collections climbed 1% from 3Q22 to $413 billion. On a four-quarter trailing basis, total state and local revenues remain unchanged from a year ago at $2.0 trillion, 2% shy of the record four-quarter trailing level set in 4Q22.

Among the largest major tax categories, 3Q23 property tax collections increased 4% YoY to $129 billion, sales tax collections increased 1% to $138 billion, and corporate income taxes increased 3% to $27 billion. Notably, individual income taxes, which comprise the majority of state revenues, declined for the third consecutive quarter, falling 2% to $119 billion, potentially indicative of the slowing wage growth throughout the year.

Among major states, New Hampshire, Nevada and Texas observed the greatest 3Q tax-collection increases from the prior year, while Alaska, Hawaii and West Virginia observed the greatest YoY declines.

Exhibit 1: Year-Over-Year Change in 3Q23 Tax Collections
Year-Over-Year Change in 3Q23 Tax Collections
Source: US Census Bureau. As of 15 Dec 23. Select the image to expand the view.

The stability of state and local tax collections continues to reflect strong labor and real estate markets. Absent a sharp economic downturn, we expect strong state and local revenues to be sustained around near record levels. While Western Asset anticipates headline budget deficits as the impact of restrictive monetary policy translates into slower growth, we expect elevated cash levels and budgetary flexibility to support credit conditions throughout the medium term. As such, Western Asset remains comfortable with taking credit risk in the municipal market, but believes current valuations and slower revenue growth trends warrant greater scrutiny versus the recent past.

Exhibit 2: Municipal Bond Yields and Index Returns
Municipal Bond Yields and Index Returns
Source: Bloomberg. As of 15 Dec 23. Past performance is not a guarantee of future results. It is not possible to invest directly in an Index. Select the image to expand the view.
Exhibit 3: Tax-Exempt and Taxable Muni Valuations
Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg. As of 15 Dec 23. Select the image to expand the view.

Western Asset Key Themes for Muni Investors

Theme #1: Municipal index yields and taxable-equivalent yields are above decade highs.

Exhibit 4: Muni and Taxable-Equivalent Muni Yield-to-Worst
Muni and Taxable-Equivalent Muni Yield-to-Worst
Source: Bloomberg, Western Asset. As of 15 Dec 23. Bloomberg Municipal Bond Index Yield Considering Highest Marginal Tax Rate. Select the image to expand the view.

Theme #2: Recent disinversion of the muni yield curve highlights potential value in moving out to longer maturities.

Exhibit 5: AAA Municipal vs. Treasury Yield Curves
AAA Municipal vs. Treasury Yield Curves
Source: Bloomberg, Western Asset. As of 15 Dec 23. Bloomberg BVAL AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. Select the image to expand the view.

Theme #3: Munis offer attractive after-tax yield pickup versus Treasuries and corporate credit.

Exhibit 6: Municipal vs. Taxable Fixed-Income Yields by Quality
Municipal vs. Taxable Fixed-Income Yields by Quality
Source: Western Asset, Bloomberg. As of 15 Dec 23. Bloomberg BVAL AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. After-tax yield considers top marginal tax rate of 40.8%. 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.