Issues & Answers Special Advertising Section:
June 2021
Mark Paris
CIO and Head of Municipal Strategies
Invesco
“The U.S. economy is also poised for a comeback, especially as vaccines become even more widespread.”
At the height of the pandemic the picture in munis appeared to be pretty grim, with mandatory lockdowns reducing revenue-generating projects for states and local municipalities. What we now know is that state and local budget projections that were made early in the pandemic proved to be largely overly pessimistic, and many key revenue drivers outperformed those estimates. For example, throughout 2020 states’ rainy-day funds remained at elevated levels. After the strain of the 2008 financial crisis, state governments devoted themselves to building reserves in preparation for another unexpected economic crisis. States have been successful in that regard with the current median rainy-day fund balance standing at 8% of state expenditures, which is almost double what it was in 2008.
From a technical perspective the municipal market has benefited from investor optimism regarding the U.S. economy, and widespread perception that taxes might be on the rise. This widespread speculation about the possibility of future tax hikes seemed to enhance the appeal of tax-free income, helping to drive investment inflows into the asset class.
This second round of federal stimulus should further stabilize state finances since $195 billion is earmarked for states. The U.S. economy is also poised for a comeback, especially as vaccines become even more widespread. In addition to stimulus, it is important not to overlook the fact that states and localities can raise taxes, and we think we will see tax increases in 2021. We view the current period as a multiyear budget rebuild, the same way the first few years after the global financial crisis were a time of economic rebuilding.
Do you think a Democrat-led federal government could yield benefits for municipal bonds?
We expect the Biden administration’s latest legislative initiatives to benefit the municipal bond market in 2021 and beyond. For example, the American Jobs Plan, better known as Biden’s $2 trillion infrastructure bill, involves an accelerated investment over four years, with funding and jobs spread out across every state in the Union. The plan is expected to provide flexible federal investments to state and local government transportation departments, with the goal of providing every American city with 100,000 or more residents with high-quality, zero-emissions public transportation options. We expect the municipal bond market to be one of the various funding vehicles used to finance the expansive infrastructure improvement project. This could be a net positive for state and local government fundamentals, as increased federal funding should lead to higher employment, economic conditions, and tax receipts.
For Institutional Investor Use. This is being provided for informational purposes only, is not to be construed as an offer to buy or sell any product or financial instruments and should not be relied upon as the sole factor in any investment making decision. The opinions expressed are those of the author and are based on current market conditions and are subject to change without notice. Invesco Advisers Inc. 05/21. NA4618