The muni market was quiet last week due to the Thanksgiving holiday. Additionally, U.S. Treasury yields changed very little as markets around the world focused on the U.S. economy and U.S. – China trade negotiations. Several economic releases right before Thanksgiving reflected better than expected economic growth. For example, the Bureau of Economic Analysis’s (BEA) November 27th press release indicated Gross Domestic Product (GDP) increased at an annual rate of 2.1% in the third quarter of 2019, slightly faster than first estimated. That said, many economists believe GDP growth will weaken in the fourth quarter because the U.S. – China trade war has led businesses to cut capital investment and inventories. Still, recent reports¹ suggest the holiday shopping season may be relatively healthy given solid job growth and consumer spending.
This week’s new issue calendar is expected to be the biggest in nearly two years with an impressive $17.4 billion scheduled for sale. Although muni yields weakened Monday, most market participants expect new issues will be very well priced (and received) given that inflows to municipal bond funds have continued their positive streak for the 47th consecutive week. Indeed, there continues to be more buyers than sellers in the muni market.
Trends in Municipal Bond Yields
As mentioned above, this week (the week of December 2nd) will see the largest municipal bond supply in the past two years with approximately $14.8 billion of negotiated sales and $2.7 billion of competitive sales; previously, the week of November 4th was the biggest of 2019 with $12.9 billion scheduled for sale. Keep in mind, however, most of this week’s supply is taxable, reflecting narrowing spreads between taxable and tax-exempt muni bonds in a low rate environment. As we have alluded to previously, the increase in issuance of taxable municipal bonds is a direct result of the prohibition of tax-exempt advanced refundings, strong retail demand, and increasing foreign interest.
Muni yields finished last week mostly unchanged from where they started (see table below). However, this week there seems to be some volatility in the secondary market trading. According to The Bond Buyer, muni yields weakened by about 10 basis points on the MBIS 10-year maturity benchmark scale and by 11 basis points in the 30-year maturity.² The MBIS AAA scale also increased by 9 basis points in the 10-year and by 7 basis points in the 30-year maturities. On Tuesday, however, yields on the MBIS benchmark scale fell by 17 basis points in the 10-year maturity and increased by 9 basis points in the 30-year maturity. Even so, most pundits believe this week’s large supply will be very well priced.
¹ CNBC “Black Friday Shoppers Spend Record $7.4 billion in the Largest Online Sales Day Ever” https://www.cnbc.com/2019/11/30/black-friday-shoppers-spend-record-7point4-billion.html
² Bond Buyer, “Muni Market Weakens Ahead of Biggest Volume Influx of 2019” https://www.bondbuyer.com/news/municipal-market-weakens-ahead-of-biggest-volume-influx-of-year?feed=0000015a-fd07-d271-a55f-fdf727ec0000
What Lies Ahead for Local Government?
As 2019 draws to a close, what will happen in 2020 and beyond? The National League of Cities (NLC) recently released its annual report on City Fiscal Conditions¹ summarizing survey responses from officials in 554 cities across the country, representing a broad cross-section of NLC members. As NLC CEO and Executive Director Clarence Anthony notes, the impact of economic growth has been very uneven across the U.S.:
“This year, we took a closer look at fiscal trends by region and city size to get a more complete picture of what different communities are facing on the ground. The reality is, the financial conditions in Dubuque, Iowa and Vail, Colorado are very different from San Francisco and Boston.
We found that most big city finance officers are now confident that there will be a recession in 2020 or 2021. And Midwestern cities — home to 68 million people — are seeing a decline in revenues so surprising that our experts had to check the data multiple times. Meanwhile, cities out West are seeing some of the strongest revenue growth.
The key takeaway from this year’s report is that the economy and local fiscal conditions are not one-size-fits-all. While some places are doing incredibly well, others are edging towards the next downturn….”
Key takeaways from the report include the fact that 63% of finance officers in large cities and 38% in mid-sized ones believe the next recession will occur in the next year or two, compared to 35% of finance officers in small cities. Interestingly, finance officers in the Midwest and in small cities are the least likely of the survey sample to think a recession will occur in the next couple of years.
Following in the same vein, Pew Charitable Trusts recently published an article highlighting the growth differences between states. In “Fiscal 50: State Trends and Analysis,” growth in each state’s combined personal income of all residents is illustrated. Generally speaking, in the past year all states have experienced gains despite turmoil in the farming sector, with Utah and North Dakota tied for first place with 3.4% annual growth from fourth quarter 2007 through second quarter 2019 – almost four times faster than last place Mississippi’s 0.9% growth rate.²
In sum, city fiscal conditions are generally a reflection of their underlying economic factors. Although most finance officers have been cautiously optimistic about the economy overall this past year, many (along with a number of economists) expect turbulent times ahead, which could result in economic and financial pressures on city budgets. Sources of revenue, as well as cost drivers, vary dramatically across the country. In prior periods of economic weakness revenues from budget components like sales and capital gains taxes are the first to see declines and are considered leading indicators. Declines in real estate taxes and fees tend to manifest later in a downturn, as stagnation or reductions in property values are generally lagging indicators, although they can persist for some time. Understanding the key drivers of your jurisdiction’s financial profile can be of great value in establishing proper financial policies, as well as targeting key ratios and metrics.
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