Muni fundamentals continue to be strong
Near the midpoint of 2023, the positive fundamental backdrop across states remains durable.
Finding opportunity in a solid muni market
Portfolio Managers Garrett Hamilton, CFA, and Paul Drury, CFA, discuss the state of the municipal bond market and current opportunities.
At 6.0%, muni index tax-equivalent yield remains elevated vs. the 10-year average.
While AAA Muni/UST ratios remain slightly rich on short- and longer-term bases, we continue to find strong relative value opportunities in A, BBB, and BB cohorts.
Sources: Bloomberg, Putnam. Data as of 7/12/23.
Why think today about tax rates in 2025
Current tax rates may have only a two-year horizon ahead.
The landmark Tax Cuts and Jobs Act (TCJA) is scheduled to sunset in 2025. Congress might not act to extend it.
Three components of our research framework
Our muni credit team researches the market from multiple angles with a disciplined process (see Research focus for more).
Some of this team's current market observations:
Favorable rainy day reserves and below-average defaults in 2022
Recovering from 2022 weakness, outflows trending down
Attractive entry points into the market and high taxable-equivalent yields
Munis have a low historical default rate
With high levels of reserves, the state and local revenue sector is better positioned for a recession compared with previous economic cycles.
*Five-year average cumulative default rates, all rated securities. Source: Moody's, U.S. Municipal Bond Defaults and Recoveries, 1970–2021 (April 2022), most recent data available.
Why muni fundamentals look strong in 2023
- State and local tax receipts fell 4% in Q1 2023. That said, overall revenues remain 28% above 2019 levels, and “Rainy Day Funds” are near all-time highs.
Rainy day funds reached highest level in 30 years, at 12% of revenue
- Most large pensions began 2022 in the best fiscal shape in a decade
- Defaults continue to run below average
There were zero defaults in March 2023.
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