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MARKETS
April 23, 2024

Weekly Municipal Monitor—NY Passes Budget

By Sam Weitzman
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Investment-Grade Municipals Posted Negative Returns Last Week

Investment-grade munis posted negative returns last week as yields moved higher across the curve in sympathy with Treasuries, which moved higher on strong retail sales data and more hawkish policy rhetoric. Meanwhile, muni technicals weakened as muni mutual funds posted outflows amid a growing new-issue calendar. The Bloomberg Municipal Index returned -0.30% during the week, the High Yield Muni Index returned -0.04% and the Taxable Muni Index returned -0.64%. This week we highlight themes from the New York state budget passed over the weekend.

Technicals Waned on Fund Outflows

Fund Flows: During the week ending April 17, weekly reporting municipal mutual funds recorded $1.5 billion of net outflows, according to Lipper. Long-term funds recorded $934 million of outflows, intermediate funds recorded $231 million of outflows and high-yield funds recorded $48 million of outflows. Short-term funds recorded $200 million of outflows. This week’s outflows lead estimated year-to-date (YTD) net inflows lower to $9.2 billion.

Supply: The muni market recorded $8.6 billion of new-issue volume last week, down 7% from the prior week. YTD issuance of $124 billion is 40% higher than last year’s level, with tax-exempt issuance 51% higher and taxable issuance 31% lower year-over-year. This week’s calendar is expected to jump to $13.5 billion. Largest deals include $3.0 billion Los Angeles Unified School District and $2.2 billion Brightline Florida Passenger Rail transactions.

This Week in Munis: NY Passes Budget

Over the weekend New York lawmakers passed a fiscal year 2025 (FY25) budget, nearly three weeks later than expected. The $237 billion budget is 3.5% larger than the FY24 budget and includes several key spending initiatives, including $2.4 billion toward New York City’s efforts to manage the migrant crisis, $435 million for climate resiliency projects and $500 million for housing projects. The state comptroller also released tax collection data from the past year. FY24 (which ended March 31, 2024) tax collections amounted to $106 billion, down from prior year levels but still outperformed the most recent budgetary estimates. Looking ahead, the FY25 budgetary tax collection forecasts signal relatively conservative revenue growth of 1.1%. Notably the budget does not include personal or corporate tax increases, and plans to maintain reserve levels above 15%. The state projects budget gaps from FY26 through FY28, although these gaps are projected to be narrower than those estimated at mid-year FY24.

Considering strong revenue levels and cash balances, Western Asset believes that New York has the ability to navigate these gaps and that the state securities provide compelling value. The Bloomberg New York Municipal Index has historically traded at lower absolute yields than national index yields, partially driven by elevated demand from an investor base subject to high marginal rates. Ever since the pandemic-driven volatility seen in 2020, New York muni yields have traded on par or higher than national levels that do not benefit from the New York state tax exemption. Last week, the Bloomberg New York Index average yield-to-worst (YTW) reached 3.70%, which is up to 8.13% on a taxable equivalent basis for a New York City residents subject to the top marginal tax rate. We expect this value proposition could lead to tighter relative spreads and a reversion to historical trends.

Exhibit 1: NY Muni Index YTW—Municipal Bond Index YTW (%)
NY Muni Index YTW—Municipal Bond Index YTW (%)
Source: Bloomberg (Bloomberg New York Muni Bond Index, Bloomberg National Muni Index), Western Asset. As of 19 Apr 24. Yield-to-worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. Select the image to expand the view.

Municipal Credit Curves and Relative Value

Exhibit 2: Muni Credit Curves
Muni Credit Curves
Source: Bloomberg, Western Asset. As of 19 Apr 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 3: Taxable-Equivalent Muni Credit Curves
Taxable-Equivalent Muni Credit Curves
Source: Bloomberg, Western Asset. As of 19 Apr 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: AAA Munis versus Treasuries
AAA Munis versus Treasuries
Source: Muni Yields: Thomson Reuters MMD, Treasury Yields: Bloomberg. As of 19 Apr 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 5: Tax-Exempt and Taxable Muni Valuations
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 19 Apr 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 6: Muni and Taxable-Equivalent Muni Yield-to-Worst
Muni and Taxable-Equivalent Muni Yield-to-Worst
Source: Bloomberg, Western Asset. As of 19 Apr 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 7: AAA Municipal vs. Treasury Yield Curves
AAA Municipal vs. Treasury Yield Curves
Source: Bloomberg, Western Asset. As of 19 Apr 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 8: Municipal vs. Taxable Fixed-Income Yields by Quality
Municipal vs. Taxable Fixed-Income Yields by Quality
Source: Western Asset, Bloomberg. As 19 Apr 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.

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