Many cities, burned by poor spending habits in the financial crisis, have hunkered down and only finance essential services, fueling a tight supply in the municipal bonds market and supporting muni-related exchange traded funds.
Municipal debt has been among the best performing fixed-income assets this year. Year-to-date, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) has gained 7.4%. In comparison, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) is up 6.1% and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) is 6.6% higher so far this year. [Muni Nation: My View From The Eighth Month]
Lifting the muni bond market, states and cities have issued $29.7 billion less debt during the first eight months of the year, compared to the same period last year, despite the growing need to update the country’s aging infrastructure, reports Aaron Kuriloff for the Wall Street Journal.
“There’s a genuine demonstrated need for infrastructure, and yet states and municipalities are just extremely cautious about borrowing,” Scott Pattison, executive director of the National Association of State Budget Officers, said in the article. “From their perspective, revenue is coming in below expectations, growth is slow compared to before the recession, the feds are creating uncertainty, so we’re going to continue to be cautious.”
Many municipalities have stuck to austere budgets since the recession ended in 2009 as officials are loath to propose new taxes ahead of the November elections. Some states are trying to pay down unfunded pension obligations or other critical needs. Moreover, summer has seasonally acted as a slow period for new bond issues.
Americans are also less enthusiastic about borrowing, revealing their ongoing pessimism with the overall economic environment. In 2006, politicians sought voter approval on a record $109 billion in bonds for funding. By 2009, the number was down to $19.4 billion, with voters approving $12.7 billion, the lowest since 2005. Last year, voters approved $22.9 billion in spending, half the average of the previous decade.
Analysts expect the cautious environment will persist, with municipal bond issuance to dip to as low as $175 billion in 2017. Tom Kozlik and Alan Schankel, analysts for Janney Montgomery Scott LLC, attribute the lack of enthusiasm for state spending to the risk of rising rates, austerity measures, high fixed costs for locak governments and lack of support for public works.
“There is nothing politically sexy about infrastructure spending,” Kozlik and Schankel said in a report.
Jamison Feheley, head of banking for public finance at J.P. Morgan Chase, believes officials are pushing off spending on anything that is not critical to public safety for at least a year or two until the economy improves.
Broad municipal bond ETFs like MUB include debt issued for a range of municipal projects. For instance, MUB includes 22.7% in transportation, 17.0% utilities, 3.9% school districts, 3.7% education, 3.3% improvement and 2.2% building, among others.
For more information on the munis market, visit our municipal bonds category.
Max Chen contributed to this article.