Municipal bond funds now account for an unprecedented 24% of outstanding debt, up from 16% five years ago, according to Federal Reserve data. The move marks the latest step in a fundamental shift from a buy-and-hold market where individual investors quietly accumulate interest year after year.
Record borrowing and investing levels in 2021 are evidence that investors have gone far beyond their initial worries the pandemic will trigger a wave of municipal defaults and bankruptcies. Encouraged by the stimulus, state and local governments issued $302.3 billion in loans for new projects as of December 29, the most in at least a decade.
Meanwhile, investors invested $64 billion in Muni mutual and exchange-traded funds as of December 15, according to data from Refinitiv Lipper, which they have more than ever during that period since tracking began in 1992. This includes $22 billion in high-yield funds. Bleeding cash last year.
“There is generally a better credit environment, you have less supply [and] More demand, and then you have investors who are willing to take on more risk to replace the yield that they previously had on their higher-grade bonds,” said Eric Friedland, director of municipal-bond research at asset manager Lord Abbett. said.
Bonds issued by state and local governments are especially valuable to investors because those interest payments are usually exempt from federal, and often state, taxes. Expectations of a possible tax hike under a Democratic administration stoked investor appetite, Friedland said.
The S&P Municipal Bond Index has an aggregate annual return of 1.76%, which includes price changes and interest payments as of December 30. This compares with minus 2.13% for the S&P US Treasury Bond Index and minus 1.79% for the S&P US. Investment Grade Corporate Bond A Index.
High-yield municipal bonds posted more significant gains as investors let go of their fear of default, with the S&P Municipal Bond High Yield Index, returning 6.77% in the year to December 30.
Government and nonprofit borrowers who issue bonds in the nearly $4 trillion municipal market are generally in better financial shape than they were last year, according to analysts and financial reports. Tax collection and stimulus funds have boosted municipal balance sheets. The federal infrastructure package signed into law last month could lead to additional funding for capital projects.
According to Merit Research Services, with 173 nonprofit hospitals filing their 2021 financial statements, the average number of cash on hand this year was 11%. For airports filing statements, average day cash increased 22% and for private colleges and universities, a similar cash metric increased 12%.
“These sectors have built up significant cash and reserves that they didn’t have at the start of the virus in 2020,” said Richard Cicarone, Merit’s president and chief executive officer. Still, he added, “not everyone is getting back in good shape.”
According to Municipal Market Analytics, defaults are rare in the muni market, higher than in the pre-pandemic period, although they have fallen since last year. Some borrowers have performed particularly poorly. There have been 32 defaults between assisted living and other senior housing borrowers so far this year, the highest since the firm’s record-keeping began in 2009.
Some state and local governments also remain on weak ground, using bond money to bridge budget gaps or relying on stimulus money to paper over financial problems. This year towns across America resorted to pension obligation lending, using a record-breaking amount of debt to top up retirement funds in hopes that market returns will outweigh interest costs.
Even with borrowing for new projects at a record 10-year record, total loan issuance fell short of some expectations. After Congress refused to include two bond programs in the infrastructure bill, Citigroup twice revised its forecast for a total 2021 issuance. Citigroup’s municipal strategy head Vikram Rai said, “We could not convince our policy makers.
Including refinancing deals, municipal borrowers had total sales of $454 billion as of December 21, a record at least 10-years.
According to an analysis of lending capacity by Municipal Market Analytics, cities and states could probably sell about $100 billion more bonds without driving down prices. The mismatch between supply and demand increased after the 2017 tax overhaul, which prohibited the use of tax-free lending for early refinancing, making tax-free yield more valuable to some investors by capping state and local tax deductions. Gave.
While muni bond rates remain at historic lows, the tax exemption can create significant value in high-income households. According to Refinitiv Municipal Market data, the 20-year AA-rated municipal bond yielded 1.49% as of December 21. According to data from property manager Nuveen, for someone in the top tax bracket to get that kind of income on a taxable security, he or she would need to yield around 2.5%.
According to Federal Reserve data, investor money has mainly poured through the fund, bringing mutual and exchange-traded muni fund holdings to more than $1 trillion as of Sept.
At the same time, the amount of municipal debt held by brokers and dealers declined to $12.1 billion, down 26% from 2019. This makes the market increasingly vulnerable to the free fall experienced in March 2020, when investors fearing how the pandemic might affect municipal credit, Muni ran out of bond funds, triggering a liquidity crisis And prices fell.
“Dealer positions are down, and mutual funds have less of a relief valve,” said Patrick Brett, head of municipal debt capital markets at Citigroup and chairman of the Municipal Securities Rulemaking Board.
This story has been published without modification to the text from a wire agency feed
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