Investors looking for a drama-free way of generating tax-free income with attractive yields received more good news recently as upgrades of municipal issuers outpaced downgrades and the number of rated issuers reached a five-year high.
S&P upgraded 153 issuers and downgraded 79 so far this year, while Fitch upgraded 45 and downgraded 13, according to The Bond Buyer, citing Municipal Market Analytics.
KBRA didn’t upgrade or downgrade issuers in the first quarter of 2024, but last year, it issued 13 upgrades and three downgrades.
Moreover, as of the first quarter of 2024, 94% of the municipal bond market was rated, the highest level since 2019.
Upgrades driven by ‘overall economy’
As the number of rated issuers grows, the main factor behind the rating upgrades is an overall strong economy, The Bond Buyer reported, citing a senior director of Fitch. Municipal revenue sources, such as sales and property taxes, are doing “very well” while “continued prudent management” has led to growing reserves.
Most rating actions were affirmations. The vast majority – 93% – of Fitch’s rating actions left issuers’ rating unchanged, though when ratings did change, upgrades surpassed downgrades by almost 4:1.
Last year, S&P Global Ratings upgraded 1,157 issuers, about 33% more than in 2022.
Welcomed in the muni market
This a familiar – and welcomed – story in the municipal bond market.
As we have pointed out, the demand for municipal bonds is fueled by a strong municipal bond market, which in turn is supported by sound issuers (“State of Issuers Aids Robust Muni Market”).
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A key element in the fiscal health of issuers has been significant federal aid begun in the wake of the pandemic. Now that support is winding down. Further, city revenues may be affected by a decline in commercial property values. However, analysts say issuers’ strong fiscal performance over the past few years should help them weather revenue dips.
While the recent spate of upgrades may level off and fiscal conditions can always change, we are encouraged by the current picture: A strong market, municipal yields not since about mid-2013 and a municipal yield curve at its steepest level in more than 10 years.
A peaceful way indeed of keeping investors’ interest clock ticking.
