Muni Bonds and the COVID-19 Era: What They’ve Been Through and Where We See Value
From our perspective, the COVID-19 era was filled with immense challenges and municipalities did what they had to do to survive. Unlike the Federal Government, municipalities did not have a printing press to fund needs without impact. It is in a crisis that the state and local system needs to work at its best. Certain “usual” elements of the services offered were delayed. Here in New York, drivers’ licenses that expired while the DMV offices were closed were deemed valid until it was safe to reopen the facilities using masks and social distancing. According to statistics shared on Bloomberg Analytics, approximately 1.3 million municipal employees were laid-off. Revenue receipts dropped. Hard decisions had to be made. During this period, tax free rates reflected the uncertainty surrounding the economy. Riskless Treasury Notes had lower yields than the tax-free universe
But by doing what was necessary, a foundation was laid for future growth and support. This is one reason why I look with pride at how the system does react in difficult times. Bonds are still being paid promptly. The above Treasury rates are from the Bloomberg daily quotes and the municipal rates reflect the daily rates calculated by Municipal Market Data, the preeminent municipal bond data provider.
My second observation is that the most interesting areas are the ones that suffered the most. Colleges went to virtual classes and empty stadiums. Student fees, dormitory charges and dining receipts fell of drastically. Spreads widened to AAA issuers. But as we slowly return to campus life, it is my opinion that these bonds will be a value beyond just the yield at which they were purchased. They will return to a tighter “spread” to other bonds.The following chart , randomly selected from our month end statements, shows the different price movements of a water bond and a university bond, both on Long Island, during the pandemic. Their maturities were both 2028 to make for more consistent comparisons.
The graph reflects the long road we still have to go to return to normal; or our “new normal” if you will. As bonds come down the maturity curve, prices slowly tend to gather toward the inevitable par. Here, after 14 months, prices still show a wider gap than before the pandemic broke out. We have similar thoughts about the healthcare industry. It is essential, and has been stressed severely. As the infection rate declines, hospitals can return to elective surgery and go back to their “new normal.”
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