Muni fundamentals continue to be strong
As we approach 2023 year-end, 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 7.55%, muni taxable equivalent yield has reached its highest point in the last 10 years.
AAA Muni/UST ratios appear cheaper on both a short- and longer-term basis, and we continue to find strong relative value opportunities in A, BBB, and BB quality cohorts.
Sources: Bloomberg, Putnam. Data as of 10/20/23.
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 2023
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 & local tax receipts fell 7% in 1H2023 vs. 1H2022, primarily driven by the inflated 2022 base as well as reduced capital gains due to weaker market performance. Overall state & local tax revenues remain 16% above their 5-year average.
Muni defaults YTD are running 28% below the previous 5-year average.
There were zero defaults in March 2023.
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