Infrastructure Bill and Investor Demand Bolster Muni Market (August 11, 2021)

Caroline Hyde: Rob Amodeo is with us, head of Municipals at Western Asset Management, and -- I'm going to do my best Taylor Riggs impression -- because she's the best woman on all things Munis. But tell us about the outlook, the environment at the moment, as we squabble over how we're going to be paying for some significant federal spending from a local level, the bonds being issued, it feels that everyone just wants in on them. The yields are so low.

Robert Amodeo: Yeah. So it's a pleasure to be here. Thank you. And we all we all miss Taylor, I think the municipal bond market is hitting on all cylinders right now. Think about the the credit concerns that were front and center just the last year. They've all but evaporated. And there's a couple of reasons for that. One is a significant improvement in tax receipts at all levels of government: sales tax, personal income tax even corporate taxes, and also the massive amount of capital that was downstream throughout the pandemic from the federal level all the way down to the local level. That has really repaired a lot of the problems in the fiscal situation in the municipal bond market. On top of that, the outsized demand for tax exempt income and the ever growing demand from the global investor base for taxable municipal securities; it will all come together and the positive investor sentiment has come together and provided some significant performance over the last year.

Romaine Bostick: A lot of the performance we saw earlier this year was, of course, I guess what ended up being an upside surprise with regards to tax revenue. There is still some concern going forward here about tax policy in a lot of these states and municipalities here. Do you see sort of a resolution of some of the bigger sticking points that still remain out there, both at the local level and even at the federal level?

Robert Amodeo: You know, I think there is. Investor sentiment is. There are a lot of moving parts to answer your question directly. And there's really no one factor you can point to at the moment, because this is going to be an ever changing environment between now and the end of the year, just as we heard from the earlier commentator. But I would imagine that the municipal bond market today is really positioning itself with the idea that corporate tax rates, individual tax rates and other tax provisions will be included in upcoming budget battle, budget packages. And that should bode well. On balance, tax reform and tax provisions will, on balance, provide some sound demand for municipal securities. So although the parts and the pieces will be moving, a lot of moving parts to contend with and a lot of leaks and such. On balance, our view is that this should provide some solid demand from municipal investors.

Robert Amodeo: So we are beginning to see some investor fatigue. We're at low levels of rates, the credit spreads are relatively tight, much tighter than where they stood just a year ago. So in this marketplace, active management is going to be key. Security selection, focusing on income, making sure you understand what you own, and more importantly, have a well diversified portfolio filled with securities that can benefit from the current environment, but also that could weather some potential unforeseen events, some some potential elevated volatility. Keep your portfolio well diversified and security selection is going to be paramount.

Caroline Hyde: I mean, we will have to be aware that tax policy doesn't always run smooth. We're just talking about how one would be paying for this 550 billion dollar infrastructure bill and who would have thought there would be crypto and the taxing of that was going to be such a thorn in the side of all the deliberations, Rob. But, to that end, you say in large part tax policy uncertainty, that's going to be something that's overhanging the munis market. What other sorts of areas should people be keeping an eye on?

Robert Amodeo: So we also have to focus on our macro view as a firm is that we're centered around the optimism of the economy reopening. And certainly there's going to be some fits and starts there and some ebbs and flows. And so you have to pay close attention to what's happening in the economy, the fundamental part of the public finance marketplace. So, you know, with this newfound revenue and newfound financial flexibility, we're going to pay very close attention to the governance at the state and local level. What are they going to do with their newfound capital? Are they just going to spend it on items that are not going to provide a return on investment or perhaps improve their ability to attract new businesses and improve their ability to attract new wealth. So we're going to pay very close attention to the governance over the next. It's going to take a couple of budget cycles. But this is a marketplace where don't sound the all clear signal. You need good fundamentals to balance in this marketplace. It might take a couple of years for some problems to surface, but you should be on your guard.

Romaine Bostick: All right, Rob, great stuff. Really appreciate you taking time to be with us, particularly in Taylor's absence. That's Rob Amodeo, head of Municipals for Western Asset Management.