State and local governments are entering the new year presented with unique circumstances and unusual economic environments. Vaccine distribution and effectiveness, a new U.S. administration, and additional stimulus packages are among the factors that will determine the path forward as we enter 2021. Still, a surge in Covid-19 cases poses a fresh challenge as we enter the winter months.
While vaccine optimism remains high, distribution and logistical challenges may pose a headwind given strong demand and limited supply. In the United States, Health and Human Services Secretary Alex Azar outlined a timeline in recent comments, indicating that there will be enough doses to vaccinate the American people by the end of the second quarter of 2021. Despite uncertainties facing the path forward, the combination of an effective vaccine and distribution should allow governments to ease lockdown measures, paving the way for the road to recovery.
Muni Market Performance
Lower quality spreads continued to tighten with November marking the seventh consecutive month of high yield (below investment grade) muni outperformance. The lower quality asset class climbed 2.40% higher for the month, according to the Bloomberg Barclays Muni High Yield Index. While higher yielding municipals have outpaced the broad market in recent times, lower quality paper remains behind year-to-date, struggling to recover from March’s drawdown. Still, muni bonds are well poised to conclude 2020 in positive territory. Through November month end, the Bloomberg Barclays Municipal Bond Index is up 4.58% for the year, with the high yield index trailing behind, advancing 2.96% year-to-date.
Municipal issuance is on track for a blockbuster year, with year-to-date supply of almost $460 billion at the time of writing. Post-election inflows have gained momentum and the broad market is on pace to end the year higher. Current supply is on track for an over 13% increase year-over-year from 2019’s $403 billion in supply. The largest contributor to the uptick in issuance can be seen coming from taxable municipals. The record-breaking $138 billion in taxable issuance this year is up over 100% from 2019 levels. Prior year taxable municipal bond issuance was near $67 billion.
