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Municipal fundamentals have staying power

As the municipal market pauses after a quick rally to start the year, positive fundamentals remain a durable theme.

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 5.69%, muni index tax-equivalent yield remains elevated vs. the 10-year average.

While AAA Muni/UST ratios* remain rich on short- and longer-term bases, we continue to find strong relative value opportunities in A, BBB, and BB cohorts.

*A commonly used valuation metric.

Sources: Bloomberg, Putnam. Data as of 4/24/23.

What the debt ceiling means to markets

A debate is brewing in Congress about whether to approve President Biden's request to raise the $31.4 trillion debt ceiling, and the issue could be on the front burner as early as July.

Read our Q&A on these key points

The debt ceiling limits the authorization for the U.S. Treasury to make payments.

Historically, Congress has raised the debt ceiling when needed.

Congress is considering proposals to raise the debt ceiling.

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:

Fundamentals
Favorable rainy day reserves and below-average defaults in 2022

Technicals
Recovering from 2022 weakness, outflows trending down

Valuation
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 were up 10.3% year over year, as unprecedented federal support during the Covid-19 pandemic and subsequent strong economic growth have bolstered municipal credit conditions.
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.

Latest fixed income and macro insights

Economic imbalances could mean deep recession or sticky inflation

A deep recession could have a significant impact on financial markets.

Inflation demands Fed's focus as bank lending tightens

Even as bank lending tightens, the Fed may still need to keep rates high for longer to bring down inflation.

The Fed walks a line between inflation and financial stability

Given the fragilities in financial markets, the Fed will likely move cautiously in monetary tightening to fight inflation.

Will interest rates go down?

Our base case for our strategy remains that a recession will wipe out excess savings, and the relatively low interest-rate environment will return.

U.S. recession outlook as China reopens

We outline possible scenarios for inflation and recession in the year ahead and how global forces play roles.

Expect a pause, not a pivot, as savings fuel spending

In the coming months, the Fed will not likely pivot, but pause and wait with a high level of rates for convincing signs of disinflation.