skip navigation
Blog

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

MARKETS
February 14, 2023

Weekly Municipal Monitor—Texas Permanent School Fund (PSF) Hits Capacity

By Thea Okin
Download the Article

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

Municipal Yields Moved Higher Last Week

Municipal yields moved higher last week, with high-grade municipal yields moving 6-11 bps higher across intermediate and long maturities, while the 7-day tax-exempt SIFMA rate doubled to 3.74%. Improved technicals supported municipal outperformance versus Treasuries and muni fund flows turned positive as supply moved higher. The Bloomberg Municipal Index returned -0.55% during the week, the HY Muni Index returned -0.83% and the Taxable Muni Index returned -1.57%. This week we highlight implications of the Texas PSF program reaching capacity last month.

Limited New Issuance Supported Market Technicals

Fund Flows: During the week ending February 8, Lipper weekly reporting municipal mutual funds recorded $775 million of net inflows. Long-term funds recorded $1.0 billion of inflows, high-yield funds recorded $530 million of inflows and intermediate funds recorded $233 million of inflows. This week’s flows reversed year-to-date (YTD) outflows to $636 million of inflows.

Supply: The muni market recorded $5 billion of new-issue volume last week, over double the prior week’s issuance. YTD issuance of $30 billion is down 15% year-over year (YoY), with tax-exempt issuance down 10% YoY and taxable issuance down 49% YoY. Next week’s calendar is expected to increase to $8.3 billion. Large transactions include $1.8 billion University of California and $1.0 billion California Community Choice Financing Authority transactions.

This Week in Munis: Texas PSF Hits Capacity

The Texas Permanent School Fund (PSF) is a state credit enhancement historically available to school districts within the State of Texas. Established in 1854, the PSF allows school districts to benefit from an established $57 billion collateral pool that guarantees principal and interest payments for school districts that issue under the program. With the PSF bond guarantee, small and large Texas school district issuers can fund projects at favorable municipal borrowing rates, commensurate with a AAA rating. In January, bonds issued under the program reached the federally established PSF capacity limit of $117 billion.

As of December 31, $106 billion (or 96%) of outstanding Texas School District issuance benefited from the PSF and its AAA rating, according to Western Asset’s analysis of Bloomberg data. To put this size in context, if the $106 billion of outstanding PSF-guaranteed securities were considered an independent issuer, Texas PSF credit would represent largest issuer within the muni market, surpassing the State of California’s outstanding issuance of $77 billion.

Exhibit 1: Texas School District PSF vs. Non-PSF Issuance
Texas School District PSF vs. Non-PSF Issuance
Source: Western Asset, Bloomberg. As of 31 Jan 23. Select the image to expand the view.

Western Asset believes that the federal limitation on the PSF could be extended, pending IRS approval. However, for now, Texas school districts must either issue bonds on their own independent credit strength, or pay for third-party insurance. In either case, Texas school districts, which are facing increasing infrastructure needs due to growing populations, will likely face above-average borrowing costs to fund facilities.

Meanwhile, municipal investors will be required to navigate increased fragmentation of this sizeable market segment. In the single month of January, more non-PSF guaranteed securities were issued than in the prior seven calendar years combined. We believe the elevated non-PSF issuance should warrant additional diligence from municipal investors, and potentially contribute to relative value opportunities.

Exhibit 2: Municipal Bond Yields and Index Returns
Municipal Bond Yields and Index Returns
Source: Bloomberg. As of 10 Feb 23. Select the image to expand the view.
Exhibit 3: Tax-Exempt and Taxable Muni Valuations
Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg. As of 10 Feb 23. 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.