The $1.1 Trillion Question: What Does Stimulus Mean for the Muni Market? | Lord Abbett
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Market View

Our experts assess the implications of the American Rescue Plan and other stimulus measures for municipal bond investors.

Read time: 2 minutes

In the latest issue of the Lord Abbett Muni Quarterly, we discuss the financial resilience of state and local governments during the pandemic-led economic and market dislocations experienced in 2020. On top of the overall strength displayed last year, municipalities are receiving significant support from the U.S. government under the American Rescue Plan (ARP) signed into law by President Biden on March 11, 2021.

Under the legislation, governments and other municipal bond issuers are set to receive a record amount of funding on top of earlier stimulus measures. As seen in Figure 1, key sectors in the general obligation and revenue-bond segments of the municipal market stand to benefit from the $1.9 trillion coronavirus relief, of which $350 billion will be available to state and local governments with additional support to the public health, education, transportation, and airline sectors.

 

Figure 1. Following the Money: Stimulus Funding for Municipal Bond Sectors

Source: Lord Abbett. Data compiled March 22, 2021. For illustrative purposes only.

 

The ARP legislation will boost revenue by providing crucial stimulus to municipal issuers and could help prevent program cuts and shore up credit concerns for state and local governments and other entities.

Here are some other facts to consider:

  • State and local governments will have a wide berth on how they spend the ARP funds. They can spend on anything other than offsetting tax-rate decreases of funding pension liabilities.
  • The impact of the stimulus funding for state and local governments will be felt over a two-year period, as 50% of the funds will be paid within 60 days of enactment and the other 50% no earlier than one year later.
  • Based upon data from Moody’s Analytics, for the states, if rainy day funds and stimulus already received are considered, no aggregate revenue shortfall exists; rather they are $16 billion in the green

Economic and Market Implications

In our view, these funds go beyond recovery and likely will prove stimulative. The ARP, in conjunction with the speeding up of the vaccination program, likely will provide much needed support for the Covid-battered U.S. economy; we believe this bodes well for the municipal market. As the economy continues to reopen, and consumer confidence continues to improve, we believe investors’ perceptions of higher credit quality and lower default risk for the broad municipal bond market will strengthen. While the status of a new $2.2 trillion initiative proposed by Biden to further bolster the economy via infrastructure spending may be less certain, the boost provided by the ARP may provide sustained support for the municipal bond market for many months to come.

Where might that lead to specific opportunities in the muni market? As we pointed out in the February 8, 2021, Market View, while there has been a rebound in tax-free, high-yield bonds over the last year, we believe there is still value in high-yield munis as their recovery has lagged other sectors.

We will cover the current and proposed stimulus efforts and their implications for municipal bond credit in greater detail in the next issue of the Muni Quarterly, publishing later in the Spring.

 

A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk. Credit risk is the risk that debt issuers will become unable to make timely interest payments, and at worst will fail to repay the principal amount. Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long term, especially during periods of downturn in the market.

No investing strategy can overcome all market volatility or guarantee future results. 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

The credit quality of fixed-income securities is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor's, Moody's, or Fitch, as an indication of an issuer's creditworthiness. Ratings range from 'AAA' (highest) to 'D' (lowest). Bonds rated 'BBB' or above are considered investment grade. Credit ratings 'BB' and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principal on these securities.

Glossary

 

The American Rescue Plan Act of 2021 is a $1.9 trillion coronavirus rescue package designed to facilitate the United States’ recovery from the devastating economic and health effects of the COVID-19 pandemic. 

The CARES (Coronavirus Aid, Relief, and Economic Security) Act is a $2 trillion stimulus passed by the U.S. Congress in March 2020, to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic.


General obligation (GO) bonds are municipal bonds backed by the “full faith and credit” of a government, and are issued by entities such as states, cities, counties, and school districts.

Revenue bonds are municipal bonds backed by revenues from a specific projects or facilities (such as toll roads, water/sewer systems, or airports).

 

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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