Interview, Fireside Chat
The Resiliency of the Muni Market
- The municipal bond market displayed exceptional resilience in 2020, with liquidity returning quickly and new issue volumes reaching record highs by year-end.
- The Municipal Liquidity Facility (MLF) was rarely utilized, with only a handful of issuers accessing the facility.
- Issuers took advantage of the market rally to refund old tax-exempt debt by issuing taxable munis as treasury rates fell.
- Default rates remained historically low with no broad credit crisis, despite idiosyncratic issues in isolated names.
- Three core factors drove market resiliency: diverse and stable underlying revenue streams, conservative financial operations, and strong balance sheets.
- Rate-driven volatility earlier in the year provided a better entry point for investors after yields were initially depressed.
- Historical patterns suggest munis generally follow treasury movements; the recent yield backup was confirmed as rate-driven rather than credit-driven.
- Tax revenues for states like California and New York reported well ahead of budget forecasts, countering initial revenue pressure expectations.
- New fiscal stimulus provides a "nice tailwind" with funds available for expenditures through 2024, including pandemic costs, lost revenue offsets, and infrastructure projects.
- Stimulus funds are explicitly prohibited from being used for tax cuts or pension contributions.
- Seasonal tax-time softness is expected to be mitigated by excess cash on the sidelines and the shift of the tax deadline from April to May.
- Strong demand is anticipated to persist due to improving credit profiles and potential future tax rate hikes favoring tax-exempt munis.
- A scarcity of long-duration, high-quality taxable munis is expected to create a natural buyer base for that specific segment.
- Supply dynamics remain uncertain as deficit financing may decrease, with potential municipal usage of funds focusing on replenishing reserves rather than new programs.
- GSAM maintained a bottoms-up security selection approach, avoiding fear-driven sentiment and focusing on specific credit fundamentals across impacted sectors.
- Investment grade and high yield munis both performed well, with credit spreads tightening significantly by the end of the year.