Viewpoints

Are Municipal Defaults on the Horizon? Probably Not

Although credit ratings could deteriorate, we believe many state and local governments are well-positioned to weather the COVID-19 pandemic.

With much of the U.S. still in the grips of the COVID-19 pandemic, the country’s economic woes continue to mount. In the months since shutdown orders began, nearly 40 million Americans have filed jobless claims, and the Federal Reserve Bank of St. Louis estimates the pandemic could put 47 million people out of work.

Not surprisingly, the economic downdraft has raised questions about the financial health of municipal issuers. But while credit downgrade risks remain and default rates may tick up from historical averages, PIMCO does not expect a large wave of investment grade or high yield municipal defaults.

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The Author

Sean McCarthy

Head of Municipal Credit Research

Tom Schuette

Investment Grade Credit Research Analyst, PIMCO Municipals

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IMPORTANT NOTICE: Please note that this material contains the opinions of the authors as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Income from municipal bonds in the United States is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax. Investors should consult their investment professional prior to making an investment decision.

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CMR2020-0529-1199025

Monthly Municipal Market Update, September 2021
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