Municipal Monthly November Municipal Market Update: Looking Past the Negative Municipal Credit Headlines Municipal bonds posted their best performance of the year, and we believe municipal credit conditions remain strong.
State revenue trends in focus: While headlines may turn negative, municipal credit conditions remain strong In recent months, state and local government tax collections have fallen from the exceptionally high and unsustainable levels in fiscal years 2021 and 2022. Total state and local revenue declined 7% in the third quarter from the same quarter last year; however, the overall backdrop remains healthy when put in context.Footnote1 State governments’ fiscal year 2024 budgeted personal income tax collections remain approximately 25% above pre-pandemic levels,Footnote2 sales tax revenues remain relatively stable, property tax trends remain positive, and state and local governments remain flush with accumulated reserves.Footnote3 We expect to see an increase in negative headlines over the coming months as state governments report softer collections relative to prior years – potentially with some falling short of 2024 budget assumptions – but this is likely indicative of a return to a more healthy and sustainable trajectory as opposed to a harbinger of growing credit weakness. Recent data from California highlights the headline-grabbing revenue declines: California’s October general fund tax receipts missed budget expectations by -31%, with personal income tax (PIT) receipts down -$20 billion relative to budget estimates.Footnote4 This shortfall likely reflects both the shifting revenue environment and the last-minute, one-month extension of the income tax filing deadline. If the October cash report is an early indicator of economic headwinds and a sizeable upcoming budget deficit, we feel California is well-positioned to manage the downturn. Unlike during the global financial crisis, the state is not dealing with a liquidity crisis or governance constraints. Rather, this is a budgetary challenge for which the state has been preparing: California maintains solid reserves and liquidity, and is already operating under a scaled back fiscal year 2024 budget. We would expect the state to respond to an upcoming deficit with austerity measures and use of reserves. While California was early to make fairly sweeping spending cuts in its 2024 budget, we would note that most large states have dialed back revenue growth estimates considerably for fiscal years 2023 and 2024. Figure 1 illustrates this, specifically showing how a number of states (e.g., Connecticut, New York, and New Jersey) passed budgets that assumed revenue declines and expectations of relatively flat growth in 2024. This is a major positive, as states did not create spending plans for the current fiscal year under the expectation of ongoing robust revenue growth; rather, they were already approaching coming budget cycles with caution. We expect this will make any coming adjustments due to revenue underperformance far easier than if budgets had assumed ongoing revenue growth. On a broad level, we believe municipal credit conditions remain exceptionally strong. Notably, the median state rainy day fund currently sits at 12% of expenditures versus a median of 4% from 2000 to 2018.Footnote5 Likewise, many local governments are sitting on historically high levels of reserves augmented by remaining federal aid funds that will be spent down through 2026. As negative headlines roll in, it is important to view data in a historical context. We will continue to provide our investors with updates on the municipal credit landscape as it unfolds. November month in review Municipal bond performance in November was the strongest of the year to date. The Bloomberg Municipal Bond Index gained 6.35% (3.98% YTD), while the Bloomberg High Yield Municipal Bond Index increased by 7.75% (6.03% YTD), and the Bloomberg Taxable Municipal Index returned 4.95% (3.70% YTD).Footnote6 The most significant gains came at the long end of the curve. Notably, state and local government debt gained more than 5%, the highest figure since January 1986.Footnote7This robust performance in November turned year-to-date returns in the municipal market positive, highlighting a strong rebound from three consecutive months of negative returns. As municipals rallied in November, yields dropped across the curve. The 1-, 5-, 10-, and 30-year tenors of the AAA Municipal Market Data (MMD) curve closed the month at 3.00% (-76 bps), 2.59% (-92 bps), 2.63% (-98 bps), and 3.77% (-80 bps), respectively.Footnote8 U.S. Treasury yields similarly fell in November, but at a more modest rate. Yields dropped at all tenors of the Treasury curve, with the 1-, 5-, 10-, and 30-year tenors ending the month at 5.14% (-32 bps), 4.28% (-54 bps), 4.34% (-54 bps), and 4.51% (-51bps), respectively.Footnote9 Performance wise, the Bloomberg U.S. Treasury Index gained 3.47% (0.67% YTD). As a result of rate movements, municipal/Treasury ratios richened significantly in November. At month-end, ratios at the 1-, 5-, 10-, and 30-year tenors of the curves were 58%, 61%, 61%, and 84%, respectively, compared to October’s month-end figures of 69%, 73%, 74%, and 91%.Footnote10 Over the first 11 months of 2023, states and localities sold $329.9 billion of long-term municipal bonds, a slight decrease of 2.8% compared to the same time frame of 2022.Footnote11 The small decline was encouraging considering the significant slowdown in overall issuance this year. Notably, the market has seen 28 deals this year exceeding $1 billion, surpassing last year's total of 24 and the previous record of 26 set in 2020.Footnote12 November concluded with total new issuance of $28 billion, down $10 billion from October’s figure but exceeding November 2022’s figure of $26 billion.Footnote13 November also saw municipal bond trading reach an all-time high of 1.5 million trades, as reported by MSRB, driven by a surge in demand from individual investors. Despite the historically high trading activity, outflows from municipal bond funds continued, bringing the year-to-date total to $18.2 billion.Footnote14 Regardless of fund outflows, we expect ETFs to continue to grow. As experienced last year, tax loss harvesting could drive significant ETF inflows in December.
Municipal Monthly October Municipal Market Update: Examining End‑of‑Year Trends Amid High Absolute Yields We review the latest developments in the municipal bond market and discuss how high absolute yields, coupled with a historically supportive end-of-year environment, may offer an attractive entry point for investors.
Municipal Monthly December Municipal Market Update: Munis Cap 2023 With Big Rally; Fundamentals Remain Strong Municipals ended the year with their strongest two-month performance since 1986; yields remain attractive.
Municipal Monthly Monthly Municipal Market Update, September 2023 A brief update on what's happening in the municipal bond market, including our views on the Puerto Rico Electric Power Authority’s ongoing woes.