US Municipal Debt Market – New Winner in Post-Covid-19 World

Whitepaper

The municipal bond (muni) market enters 2022 with strong fiscal and monetary support. Such support, along with an improved operating environment, helped munis outperform other traditional fixed income asset classes in 2021. The total return on the Bloomberg Municipal Bond Index was 1.52% as of 20 December 2021, while Treasury and corporate bond indices lost -2.32% and -1.04%, respectively.
However, with monetary tightening and the removal of certain fiscal support measures, munis could face headwinds in 2022. Nevertheless, they remain an attractive building block for portfolio construction given their appealing tax-adjusted yields.
This white paper provides an overview of munis’ performance in 2020 and 2021. Each of these years saw record issuance of more than USD475bn. The paper also lists the opportunities in the muni market and an outlook for the coming year.

Key Takeaways

1)Record gross muni issuances amounted to USD485bn in FY20 and USD360bn in 9M21.
2)Munis outperformed the broader fixed income market with returns of 0.8% YTD in 9M21, while Treasury and IG corporates had negative returns of 2.50% and 1.27%, respectively.
3)Munis benefitted from government schemes such as the American Rescue Plan, the American Jobs Plan and the American Families Plan under the USD7tn Build Back Better Act.
4)Munis will likely remain an attractive asset class given strengthening credit fundamentals, the normalisation of economic activity and a balanced budget.

Authors

Nitin Singal

Delivery Manager, Investment Research

Nitin has over nine years of experience in fixed income markets, with a focus on credit analysis of corporates and hands-on exposure to bonds origination for sovereigns, supranationals and local agencies. He has also worked on designing the annual funding strategies and issuance plans of government-owned companies. He currently supports a global alternative asset manager on building financial models and preparing credit reports for high-yield and distressed credits. He holds a Master of Business Administration in Finance and a Bachelor of Technology in Mechanical Engineering.

Ashutosh Pandey

Delivery Lead, Investment Research

Ashutosh has over nine years of experience in credit research, with expertise in US municipal markets and not-for-profit corporates. He currently supports a US-based global investment manager, with a focus on taxable and tax-exempt US municipal debt. Ashutosh provides investment recommendations and commentary on the credits through periodic review and keeping a track of developments. He holds a Master of Business Administration in Finance and a Bachelor of Technology in Electrical and Electronics Engineering.

US Municipal Debt Market – New Winner in Post Covid-19 World