August 16, 2017
The municipal market has become increasingly focused on the political drama of Illinois and Chicago, eleventh-hour passages of 2018 budgets, and the restructuring of Puerto Rico’s debt complex. As the themes that led to these issuers’ credit deterioration extend to other municipalities, we expect the watch list of weaker credits in the municipal market to expand. Rating agencies have recognized that credit risk has broadened to more states, as evidenced by their negative actions against 11 states in the first half of 2017. Eleven states began fiscal year 2018 without enacting budgets, up from four states last year. Inescapable structural pension issues and reconciliation of far-reaching federal policies (e.g., healthcare) will continue to put pressure on cash-strapped municipalities.
The Bloomberg Barclays Municipal Bond index posted a 2.0 percent gain during the second quarter of 2017, with longer-maturity bonds continuing to outperform the short-end and lower-quality bonds outperforming higher quality. BBB-rated and A-rated municipal bonds returned 2.1 percent and 2.2 percent, versus 1.9 percent for AA-rated bonds and 1.7 percent for AAA-rated bonds.
Following 2016’s record-setting year for municipal debt issuance of approximately $446 billion, year-to-date supply ending June 30 declined by approximately 13 percent year over year.
Source: SIFMA. Guggenheim Investments. Data as of 7.25.2017.
Since 2011, average annual new money supply hovered at levels approximately 33 percent below that of the decade ending in 2010. In contrast, refundings began to exceed new money supply each year since 2012, which has methodically narrowed the municipal market’s breadth of issuers. Within this new issuance pattern, volumes have been dominated by the same states and issuers. In addition, supply trends will be influenced by refinancings upon the 10-year anniversary of the Build America Bonds program, which lasted from February 2009 to December 2010, when approximately $15 billion and $30 billion of taxable bonds become callable in 2019 and 2020, respectively. We believe supply-demand dynamics and negative sentiment on credit risk will keep us focused on higher quality benchmark names and issuers neglected by wide market coverage.
Refundings began to exceed new money supply each year since 2012, which has methodically narrowed the municipal market’s breadth of issuers. Within this new issuance pattern, volumes have been dominated by the same states and issuers.
Source: Thomson Reuters, Guggenheim Investments. Data as of 7.25.2017.
—James Pass, Senior Managing Director; Allen Li, CFA, Managing Director
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