The Fed’s Intervention and the Muni Market (April 1, 2020)

Taylor Riggs: Joining me today is Robert Amodeo. He's head of Municipals at Western Asset Management. Robert, curious to get your thoughts on the Fed's intervention in the muni market. If it does enough to calm a lot of the volatility, at least on the front end of the curve?

Robert Amodeo: Yeah, sure I will. It's a pleasure to be here and thank you. I think we all know the scale of the social and the economic disruptions in the marketplace are unprecedented. And with that, the municipal budgets already under strains that weren't anticipated just a few months back. But as you said, the Federal Reserve injection of liquidity into the marketplace, we believe is helpful and has calmed, especially the front part of the municipal bond market. And in particular, away from that, the CARES Act, which was signed by Congress last week, also includes a significant amount of aid for state and local governments. And that's going to provide liquidity to address the near-term costs associated with the virus related challenges.

Taylor Riggs: Is that assistance enough or are you really still concerned a lot about the state budget gaps?

Robert Amodeo: We're always concerned about the state budget gaps and certainly the dynamics of the severity of the current situation will be determined by the length of time it takes us to get past the virus related challenges. But, clearly, state and local governments are on the front lines in confronting the pandemic, and that's going to require spending for services while facing the revenue shortfalls due to the lockdowns that are rolling across the US economy. Now, this is not the first time, though, that the municipal bond market has faced these unprecedented times. You look back and perhaps not in the same scale, but you look back to natural disasters that could act as somewhat of a good proxy where municipal credit had successfully weathered short term yet complete economic shutdowns for entire regions. And with that, you know, using that as precedent. Granted, again, it's not the same scale, but they've come out of it in pretty good shape.

Taylor Riggs: What about some of the individual credits? I'm thinking airports or the MTA, for example, if they're facing a potential default, given the loss of revenue?

Robert Amodeo: Sure. So I think that situation is very real. Obviously, broadly, investment grade has outperformed below investment grade and the liquidity dynamics in the marketplace can be summed up as indiscriminate selling. And in most sectors of the marketplace, in particular, transportation, transportation related type credits. You know, our view there is that U.S. mass transit systems vary widely in sources of debt service payments. So, for example, strong, large airport hubs are poised to rebound pretty quickly. But others that are more dependent on ridership like MTA, they're a bit more vulnerable. Obviously, it's not one of our favorite credits to begin with, but the large scale capital programs and the heavy reliance on the federal subsidies make them a bit more vulnerable. However, MTA has all types of debt out there and they are current on their debt service and any shortfall in revenue due to these virus related challenges will impact their operating budget first.

Taylor Riggs: Yes. Robert Amodeo, head of Municipals at Western Asset Management, thank you as always. Bonnie, back to you.