skip navigation
Blog

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

ECONOMY
26 March 2024

Weekly Municipal Monitor—State and Local Revenues Improve

By Sam Weitzman
Download the Article

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

Municipals Posted Negative Returns Last Week

Munis posted negative returns last week and underperformed Treasuries, which moved lower during the week. High-grade muni yields moved higher across the yield curve and market technicals improved on muni fund inflows and lower supply. The Bloomberg Municipal Index returned -0.18% during the week, the High Yield Muni Index returned 0.05% and the Taxable Muni Index returned 0.90%. This week we highlight state and local revenue estimates released last week by the US Census Bureau.

Market Technicals Remained Supportive Amid Fund Inflows, Lower Supply

Fund Flows: During the week ending March 20, weekly reporting municipal mutual funds recorded $64 million of net inflows, according to Lipper. Long-term funds recorded $145 million of inflows, intermediate funds recorded $38 million of inflows and high-yield funds recorded $180 million of inflows. Short-term funds recorded $70 million of outflows. This week’s inflows lead estimated year-to-date (YTD) net inflows higher to $6.6 billion.

Supply: The muni market recorded $6 billion of new-issue volume last week, down 40% from the prior week. YTD issuance of $89 billion is 35% higher than last year’s level, with tax-exempt issuance 48% higher and taxable issuance 49% lower year-over-year (YoY). Tax-exempt issuance has comprised 95% of issuance YTD. This week’s calendar is expected to jump to $9.6 billion. The largest deals include $2.7 billion State of California General Obligation and $1.4 billion New York City General Obligation transactions.

This Week in Munis: State and Local Revenues Improve

Last week the Census released 4Q23 state and local revenue estimates, highlighting continued strength in overall state and local tax collections. Fourth quarter state and local government tax collections grew 5.2% from 4Q22 levels to $616 billion. Major state revenue tax components of individual income, corporate income and sales tax collections increased YoY by 8.0%, 13.9% and 1.7%, respectively. Property tax collections, the primary source of revenues for local governments, increased 4.7% YoY to $303 billion.

Calendar-year 2023 tax collections increased marginally (0.5%) from 2022 levels to $2.0 trillion. Property tax collections and sales tax collections increased during the year, growing 11% YoY and 2.2% YoY, respectively. The favorable growth in property and sales taxes was mostly offset by declines in individual income tax collections and corporate income tax collections of 13% and 2%, respectively, weighing on state revenues during the year.

Exhibit 1: 12-Month Trailing State and Local Tax Revenue Collections
Explore 12-Month Trailing State and Local Tax Revenue Collections
Source: Western Asset, Census NSA major state and local tax revenue. As of 31 Dec 23. Select the image to expand the view.

The majority of states recorded revenue declines in 2023, and on average, estimated state revenues declined 4% during the year. In YoY terms, New Hampshire (+24%), Maryland (+7%) and Ohio (+7%) recorded the highest growth in estimated tax revenue, while Alaska (-50%), California (-17%) and Iowa (-13%) recorded the greatest revenue reductions.

Exhibit 2: Change in 12-Month Trailing Collections (YoY)
Explore Change in 12-Month Trailing Collections (YoY)
Source: Western Asset, Census NSA major state and local tax revenue. As of 31 Dec 23. Select the image to expand the view.

Continued growth of state and local tax collections in 2023 highlights the resiliency of municipal credit, despite signs of a broader economic slowdown. The local government sector remains the largest sector of the municipal market, which continues to be supported by a strong real estate market and strong property tax collections. While state tax collections declined in 2023, fourth quarter data highlights that revenues are trending in a favorable direction. As certain states emerge from this budget season with potential shortfalls due to lower revenue collections, we anticipate robust cash balances collected throughout the pandemic recovery period will support muni credit over the medium term.

Municipal Credit Curves and Relative Value

Exhibit 3: Muni Credit Curves
Explore Muni Credit Curves
Source: Bloomberg, Western Asset. As of 22 Mar 24. Bloomberg BVAL Municipal Credit Indices (AAA, AA, A, BBB, respectively) and US Sovereign Curves. Taxable-Equivalent Muni Credit Curves consider the top marginal effective tax rate of 40.8%. Select the image to expand the view.
Exhibit 4: Taxable-Equivalent Muni Credit Curves
Explore Exhibit 4: Taxable-Equivalent Muni Credit Curves
Source: Bloomberg, Western Asset. As of 22 Mar 24. Bloomberg BVAL Municipal Credit Indices (AAA, AA, A, BBB, respectively) and US Sovereign Curves. Taxable-Equivalent Muni Credit Curves consider the top marginal effective tax rate of 40.8%. Select the image to expand the view.
Exhibit 5: AAA Munis versus Treasuries
Explore AAA Munis versus Treasuries
Source: Muni Yields: Thomson Reuters MMD, Treasury Yields: Bloomberg. As of 22 Mar 24. 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 6: Tax-Exempt and Taxable Muni Valuations
Explore Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg. Yield-to-worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. As of 22 Mar 24. Select the image to expand the view.

Western Asset Key Themes for Muni Investors

Theme #1: Municipal taxable-equivalent yields are above decade averages.

Exhibit 7: Muni and Taxable-Equivalent Muni Yield-to-Worst
Explore Muni and Taxable-Equivalent Muni Yield-to-Worst
Source: Bloomberg, Western Asset. As of 22 Mar 24. Bloomberg Municipal Bond Index Yield Considering Highest Marginal Tax Rate of 40.8%. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.

Theme #2: The inverted yield curve suggests less relative value in 5- and 10-year maturities.

Exhibit 8: AAA Municipal vs. Treasury Yield Curves
Explore AAA Municipal vs. Treasury Yield Curves
Source: Bloomberg, Western Asset. As of 22 Mar 24. Bloomberg Valuation Service (BVAL) AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.

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

Exhibit 9: Municipal vs. Taxable Fixed-Income Yields by Quality
Explore Municipal vs. Taxable Fixed-Income Yields by Quality
Source: Western Asset, Bloomberg. As 22 Mar 24. 10- and 30-Year comparison reflects Bloomberg Valuation Service (BVAL) AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. AA Muni reflects the Bloomberg AA Muni Bond Index. A Muni reflects the Bloomberg A Muni Bond Index. BBB Muni reflects the Bloomberg BBB Muni Bond Index. HY Muni reflects the Bloomberg High Yield Muni Bond Index. AA Corp reflects the Bloomberg AA Corporate Bond Index. A Corp reflects the Bloomberg A Corporate Bond Index. BBB Corp reflects the Bloomberg BBB Corporate Bond Index. After-tax yield considers top marginal tax rate of 40.8%. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. 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.