Municipal Spreads are Lacking Luster


Spreads on short municipal paper (10yrs and in) are well inside their historic averages. 


Source: UBS. As of March 17th, 2023.


Municipal Supply Remains Tight


The expected muni supply coming to market is light. Municipalities saw record tax receipts in 2020 & 2021 from rising asset values and home prices. In addition, they received an unfathomable amount of fiscal support from the Federal Government which curtailed need for issuance.


Source: UBS. As of March 17th, 2023.


Over the last 10 years, municipalities have had a historic opportunity to lock in record low interest rates and extend durations of their debt maturity profiles to yield starved investors. Most issuers jumped at this opportunity. 


Source: UBS. As of March 17th, 2023.


There have not been many deals year to date (especially in the southern states) which continues to curtail supply available in the secondary market and drive in spreads (as can be seen in the graphic below). 


Source: UBS. As of March 17th, 2023.


A Few Weak Links


A few states like California and New York are facing problems with high costs of living, high crime and weakening state income taxes which is beginning to weigh on tax receipts. In addition, budget problems are spilling over to their fiscal situation (i.e., a balanced budget ain’t in the cards) like rising unemployment and a likely drop in corporate taxes. We know both of these states are highly reliant on capital gains tax revenues which are harder to find given the decline in asset values the last 15 months. 


Source: Strategas. As of March 17th, 2023.


In a positive light, most of the rest of the country is in better shape. We continue to believe that for states that did not overspend during the pandemic, have high immigration, and have lower crime rates, municipal stress will not likely be an issue in the coming years.


Municipals No, CDs Yes?


Bottom line, current spreads on municipal bonds are historically unattractive, when compared to similar duration Treasury bonds. Most offerings in our typical “buy zone” (1-10 year call / < 15 year final maturity) don’t excite us. While a savvy trader can occasionally find some opportunities, the current backdrop is much less attractive.

On the other hand, banks have increased deposit rates on brokered CDs to attract assets. In turn, we have seen the spread to Treasuries increase to historically attractive levels, as shown below:


Source: SouthState Bank. As of March 17th, 2023.


Remember, CDs are FDIC insured up to $250k. The recent uptick in spreads could create an interesting opportunity to ladder out CDs for clients looking for defensive, insured interest income on their capital. Lastly, considering the lifeline thrown to banks with the new BTFP Liquidity facility in place, I don’t think this opportunity will last forever. 




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