Few people are electrified by state revenues, but if you’re wondering what’s behind investors’ ravenous appetite for municipal bonds, they provide a telling clue.
In the decade since the Great Recession, state revenues have been on a steady upswing. For those with long memories, this news provides a sharp contrast to the narrative provided by the doomsayers 10 years ago, when they predicted fiscal Armageddon across the country.
Another factor explaining the enthusiasm is something most veteran investors already know, but is bolstered by a long-term Moody’s analysis: muni bonds continue to be highly rated and muni bankruptcies remain rare.
Although municipal bonds rarely command the fanfare similar to other securities, sparkling fundamentals are motivating investors and helping munis perform the way they’re supposed to.
State revenues on upswing
Positive news from states was provided by a National Association of State Budget Officers study that showed an increase of 4.2% in state revenues last year, which followed a bump of 6.9% the year before.
“States are in better positions than they have been at any time since the end of the Great Recession,” said John Hicks, executive director of NASBO, according to the Bond Buyer.
“As everyone knows, it has been a long and difficult recovery from the Great Recession for a lot of states,” said Marcia Van Wagner, of Moody’s. “What we’re looking at in the last couple of years is more of a return to more historically comparable rates of growth and consequently states are playing some catch up in areas they had to cut back on.”
Overall, the outlook remains steady, too.
In a Moody’s report “Municipal Bond Defaults and Recoveries, 1970-2018,” the rating agency reported there were no rated municipal defaults in 2018. And for the third year in a row, there were more issuers that were upgraded than downgraded.
In an update to a report we previously discussed (“What a 48-year Muni Market Study Shows”), Moody’s said there have been only 113 defaults in the total amount of more than $72 billion across all sectors of the muni market over the past 48 years. And three instances comprised more than 90% of the defaults.
For perspective, more than 50,000 different state and local governments and other authorities issue bonds.
Comparison to corporates
Compared with corporate bonds, muni defaults are also very rare.
Moody’s reported that although the five-year all-rated default rate during the study period (1970-2018) ticked up to 0.10%, from 0.09% during the period 1970-2017, it’s still very low.
This compares with the five-year cumulative default rate of 6.6% for global corporate bonds over the same time period.
Almost a decade after the financial tumult of 2007-2009, and for the second year in a row, Moody’s said the credit quality of the municipal bond sector is stable. Growth and economic recovery in many parts of the country contributed to the stability, though analysts note there are differences among states in growth and spending.
It’s always important for municipal bond investors to understand the issuer and quality of the bonds they invest in. Beyond the din of chatter and attention-grabbing headlines of other securities, the muni market is buoyed by strong fundamentals forged over years.