skip navigation
Blog

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

MARKETS
February 22, 2022

Weekly Municipal Monitor—Labor Shortages Hit Health Care

By Fred Poon

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

Municipals Posted Negative Returns During the Week

US municipals posted negative returns during the week and generally underperformed Treasuries as ratios moved higher in the short and intermediate part of the yield curve. High grade municipal yields moved 4-7 bps higher in short and intermediate maturities as the curve flattened. Demand for tax-exempt munis remained weak as municipal fund outflows persisted. The Bloomberg Municipal Index returned -0.18%, while the HY Muni Index returned -0.04%. This week we highlight the impact of labor shortages on the health care sector.

Weak Technicals Were Driven by Mutual Fund Outflows, Partially Offset by Limited Issuance

Fund Flows: During the week ending February 16, weekly reporting municipal mutual funds recorded $1.3 billion of net outflows, according to Lipper. Long-term funds recorded $1.2 billion of outflows, high-yield funds recorded $776 million of outflows and intermediate funds recorded $114 million of outflows. Municipal fund outflows year to date (YTD) extended to $7.2 billion.

Supply: The muni market recorded $5.6 billion of new-issue volume, down 28% from the prior week. Total YTD issuance of $49 billion is 13% higher from last year’s levels, with tax-exempt issuance trending 45% higher year-over-year (YoY) and taxable issuance trending 56% lower YoY. This week’s new-issue calendar is expected to remain below average at $4.3 billion given the holiday-shortened week. Largest deals include $1.1 billion Virginia Small Business Financing Authority and $412 million Nature Conservancy transactions.

This Week in Munis—Labor Shortages Hit Health Care

The municipal market has not been immune to the labor market shortage impacting the broader US economy. While January nonfarm payrolls remain just 1.9% below pre-pandemic peaks, state and local payrolls remain 3.7% (718,000 jobs) below the pre-pandemic peak, according to the Bureau of Labor Statistics. This week we explore the health care sector, where health care payrolls remain 3.0% below pre-pandemic levels, despite increased demand for services observed in the sector.

Exhibit 1: State and Local Employment vs. Health Care Employment
State and Local Employment vs. Health Care Employment
Source: Bureau of Labor Statistics. As of 31 Jan 22. Select the image to expand the view.

Health care operations are labor intensive, with salaries, wages and benefits typically accounting for half of a hospital’s operating expenditures. Many health care systems were challenged by labor shortages entering the pandemic, driven by a dearth of qualified nursing candidates relative to the growing demand for services. Elevated demand for health care services throughout the pandemic period and the more recent rebound of elective services have further magnified labor shortages in the sector. Employee turnover has risen due to taxing working conditions, opposition to vaccine mandates, and elevated competition from other sectors. Hospitals already operate on relatively modest margins, and financial performance may be affected if labor shortages contribute to rising labor costs.

Considering current valuations paired with improving demand for services and longer-term demographic trends, Western Asset is constructive on the health care sector. However, we tend to favor larger systems that benefit from operational scale and strong balance sheets, which should provide flexibility in the challenging environment. We expect these larger systems to have better access to talent and be in a better position to provide solutions that drive labor force stability. Over the longer term, we will focus on how the sector addresses its labor shortages, which we anticipate could be a mix of increasing immigrant hiring and utilizing technology to better allocate resources. Meanwhile, we are cautious on smaller hospitals, assisted living facilities and continuing care retirement communities where we have recently observed increased defaults due to unfavorable volume trends that have been exacerbated by higher costs at least partly attributable to labor shortages.

Exhibit 2: Municipal Bond Yields and Index Return
Municipal Bond Yields and Index Return
Source: Bloomberg. As of 18 Feb 22. Select the image to expand the view.
Exhibit 3: Tax-Exempt Muni Valuations
Tax-Exempt Muni Valuations
Source: Bloomberg. As of 18 Feb 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.