During periods of economic uncertainty, near-term decisions can determine the nature and durability of the recovery that drives long-term credit quality. I believe there is some cause for optimism for recovery in the municipal bond market. There may be many bumps in the road, but fears of many humpty-dumpty defaults really belong more in a story about Chicken Little.
My many years working with the municipal bond market entitles me, I suppose, to offer some perspective on what has occurred over the past two months, and what we might anticipate for the next few months. There isn’t anyone who has not, in one way or another, asked “What do I do next?” To frame some possible answers, here are a few “markers” to consider.
These observations are, in and of themselves, touching important elements as to the restoration of economic and marketplace confidence. I cannot predict the path or duration of COVID-19, but it is certain to disrupt economic activity – everywhere. Its impact will be upon each entity that issues bonds for public improvements and purposes, to some greater or lesser degree. The bad news is that we cannot predict the impact everywhere. But the good news is that, owing to the structural requirements of bond financings in the municipal space, issues that carry ratings from Moody’s, S&P and Fitch not only build reserves into each financing, but the ratings that are achieved are done so based, in part, upon the concept of “rainy day” reserves set aside by the issuer to meet contingencies such as what we are now witnessing.
The municipal industry has a long history of very strong credit quality and very low default experience. Though credit quality will be reviewed and tested in the months to come, these points will be important to note as investment decisions are made going forward:
All things considered, while we expect some bumpy roads in the near-term, I am optimistic about the municipal bond market’s recovery. The attributes that have historically contributed to the strength of this market are still there and may factor into its recovery.
1 Source: JP Morgan. Data as of May 13, 2020.
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