skip navigation

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

June 21, 2022

Weekly Municipal Monitor—Wrapping Budget Season

By Thea Okin, Daniel Zheng

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 across the curve, resulting in higher Municipal/Treasury ratios. High-grade municipal yields increased 31-35 bps across the curve. Weekly reporting municipal mutual fund outflows accelerated. The Bloomberg Municipal Index returned -2.00%, while the HY Muni Index returned -3.56%, sending year-to-date (YTD) returns below -10%. This week we highlight overriding municipal budget themes as we enter a new fiscal year for most municipalities.

Market Technicals Weakened as Municipal Mutual Fund Outflows Accelerated

Fund Flows: During the week ending June 15, weekly reporting municipal mutual funds recorded $5.6 billion of net outflows, according to Lipper. Long-term funds recorded $5 billion of outflows, high-yield funds recorded $1.8 billion of outflows and intermediate funds recorded $286 million of outflows. The week’s fund outflows mark the highest weekly outflow of the year, and contribute to the record $73 billion outflow cycle.

Supply: The muni market recorded just $2.5 billion of new-issue volume, down 66% from the prior week. Total YTD issuance of $189 billion is now 2% lower than last year’s levels, with tax-exempt issuance trending 6% higher year-over-year (YoY) and taxable issuance trending 31% lower YoY. This week’s new-issue calendar is expected to increase to $7 billion. Large deals include $1.6 billion City of Los Angeles and Revenue Anticipation Notes and $1.2 billion State of Georgia transactions.

This Week in Munis: Wrapping Budget Season

June 30 marks the end of fiscal year 2022 for the majority of municipal issuers, and most major municipalities have proposed or enacted budgets for the coming fiscal year. An overriding theme of these budgets is that municipal credit fundamentals continue to improve, and while broader macroeconomic volatility is anticipated, recent fundamental trends place municipalities in a better position to navigate inflation pressures and slowing growth trends.

State and local revenues, as highlighted by Census data released this month, align with the improved revenue trends highlighted in most municipal budgets. Over the trailing 12 months, tax collections from major state and local categories (property taxes, sales taxes, and income taxes) reached a record $1.9 trillion, up 16% from the prior record-breaking year. 1Q22 total state and local tax revenues were 21% higher than 1Q21 levels. Robust revenue collections have provided the bandwidth for states and local governments to pursue a variety of initiatives within their budgets. Most municipalities have increased rainy day funds and reserves which could help provide support through budgetary shortfalls that could arise from an economic contraction. We have also observed issuers with historically higher debt burdens de-lever outstanding debt and make higher pension contributions, which could soften the impact of negative market returns.

States are also utilizing excess surpluses to provide direct cash refunds to residents, which can lower their burden related to the inflation of gas, groceries and housing costs. Many large states and localities have also provided additional funding for public safety and social services to tackle homelessness and crime, as well as other quality-of-life improvements such as investing in parks, cultural institutions and other public spaces. While improved fundamentals support the trend of upgrades that have surpassed downgrades across the municipal market over the past year, we anticipate this credit improvement could be peaking in a late-cycle environment. We caution that much of the fundamental improvement was directly or indirectly attributable to robust, but temporary, federal stimulus measures. As we look forward to fiscal year 2023, Western Asset will focus on issuers that can sustain their fiscal positions in a slower growth environment with less federal support.

Exhibit 1: 12-Month Trailing State and Local Revenue Collections
Explore 12-Month Trailing State and Local Revenue Collections
Source: Census. As of 31 Mar 22. Select the image to expand the view.
Exhibit 2: Municipal Bond Yields and Index Return
Explore Municipal Bond Yields and Index Return
Source: Bloomberg. As of 17 Jun 22. Select the image to expand the view.
Exhibit 3: Tax-Exempt and Taxable Muni Valuations
Explore Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg. As of 17 Jun 22. Select the image to expand the view.
© Western Asset Management Company, LLC 2023. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past performance does not predict future returns. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
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 Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. 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.