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Fixed-Income Insights

Public power has remained a stable, relatively defensive municipal bond sector.

This article is from the second-quarter 2019 edition of The Muni Quarterly.

Public power continues to be a stable sector in the municipal bond market, underpinned by inherent strengths such as an independent rate-setting authority, the essential public services the sector offers, and a government-protected monopoly. As an investment, the sector is relatively defensive given its low correlation with economic cycles. Financial metrics are sound, with strong liquidity and high debt-service-coverage ratios remaining relatively unchanged year over year. Electric rates remain competitive and affordable.

We continue to monitor trends in capital spending, regulation, and climate change. Capital planning is difficult given long construction timeframes and the uncertainty of long-term demand. However, this is offset by the ability to pass costs onto ratepayers without the need for third-party regulatory approval. Regulatory uncertainty at the federal level has not been that impactful as state level regulations have generally been the bigger driver in capital expenditure plans. Climate change is believed to have increased the frequency of extreme weather events, but, again, independent rate-setting authority largely offsets this risk. “Black swan” events like prolonged cyber-attacks have been seen in recent headlines, but we believe events such as these remain highly unlikely.

In conclusion, while there are some trends to follow, we expect the public power sector to remain stable.

 

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THE MUNI QUARTERLY

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The Second Quarter 2019 edition offers insights from our analysts on key topics for municipal bond investors, along with essential market information.

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