Muni Defaults Surge, but Yields Don't Follow
By Sebastian Pellejero
The coronavirus has dealt a harsh blow to state and local
government finances. But the municipal bond market rolls on.
Yields there have hit their lowest level since 1982, reflecting
a significant increase in bond prices, despite the largest run of
municipal-bond defaults in nearly a decade.
The rally has been driven by dynamics new and old, ranging from
the extraordinary efforts of the Federal Reserve to backstop the
U.S. economy to the continued aversion of many voters to new
municipal issuance. That resistance might result in borrowers
missing out on one of the great issuance opportunities on record,
at a time when many are being crushed by the falloff in taxes, fees
and other revenues.
"Borrowers are going to scrutinize issuing debt for new projects
going forward," said Howard Cure, director of municipal bond
research at Evercore Wealth Management. "States have delayed a lot
of tough decisions in anticipation of federal money and will have
to start making cuts if that money isn't forthcoming."
Even with coronavirus losses weighing heavily on state and city
coffers, investors are piling back into municipal debt, hungry for
yield and seeking more safety than the stock market can provide.
Investors have put about $28 billion back into muni mutual funds
since the end of April, according to Refinitiv Lipper, nearly 60%
of the amount pulled during the height of the pandemic.
Inflows have continued even as defaults rise. Universities,
convention centers, student housing and senior living facilities
are confronting significant disruptions to revenue, sending some
into insolvency. As of July 31, there were a total of 50 municipal
defaults, according to Municipal Market Analytics -- the most since
Public officials meanwhile have been hesitant toward taking on
debt during economic uncertainty. New muni issuance is down nearly
2% this year, according to Refinitiv, even when including taxable
bonds. Many borrowers are responding to the coronavirus hit by
either cutting spending or coming to market to refinance existing
debt at near-zero interest rates for savings.
"You're seeing some caution around the amount of borrowing,"
said Tom Doe, president of Municipal Market Analytics. "There's
increasing concern that more credit problems will emerge."
In Wisconsin, the state government is cutting spending by $250
million across all agencies and recently completed a series of
taxable bond deals that helped cut debt service costs by $29
million. The 2017 tax overhaul limited borrowers' ability to
refinance old bonds by selling tax-free debt, through what are
called advance refundings.
While recent federal aid has helped the Badger State manage
expenditures, the problem now is making up the revenue lost during
the coronavirus shutdown, said David Erdman, capital finance
"This is not going away anytime soon," he said. "We have started
making cuts, but at this point we're not going to be forced into
the capital markets for cash flow purposes."
Many borrowers are waiting to see what money they will receive
from Congress in the next relief bill. Congress hasn't approved any
aid to make up for lost revenue, and cities and states are
suffering huge losses in sales and income tax collection as the
pandemic has driven unemployment to record levels and eroded
Even with federal aid, some issuers might still sell new bonds,
said Greg Saulnier, managing analyst at Refinitiv MMD.
"You have to believe some state and local governments are
waiting on the sidelines," he said. "At record low yields, most of
them certainly can hit the market."
Write to Sebastian Pellejero at email@example.com
(END) Dow Jones Newswires
August 14, 2020 08:36 ET (12:36 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.