This is the beginning of Neighborly’s inaugural report to members of the municipal finance community. The content for the report is provided by, and is the opinion of public finance research firm, Court Street Group Research, featuring the writing of industry experts George Friedlander, Joseph Krist, and Lynne Funk Posner. We’re excited to be partnering with them to deliver timely and relevant marketplace information to dedicated public finance professionals like yourself. To read the full report, click here.
TRENDS IN THE MUNICIPAL MARKET:
On Friday last week, market participants watched a stronger-than-expected monthly employment report push Treasury and Municipal bond benchmarks into cheaper ranges. This came after what had been a very strong July where yields decreased and issuers generically saw their primary borrowing costs lower.
Drivers of this performance over the second half of the Summer can be found from seasonally low issuance and continued positive fund flows. To be precise, total issuance is about 13% lower than last year, year-to-date through July, largely driven by the drop in refundings (down about 50% compared to last year).
Meantime, fund flows saw a third straight week of inflows. According to Lipper, $144 million was added to mutual funds that purchase municipal bonds. One concern here, though, is that the dollars added have been on a decline, perhaps as investors focus on a booming Dow Jones Industrial Average and dwindling yield opportunities in the fixed-income space.
This week’s supply picture is about par for the course as far as seasonal figures come. Mid-August is not typically a large issuance period for the marketplace, so for those that are coming to market, the supply/demand balance largely falls in your favor. New York City’s Transitional Finance Authority will lead market tone with several large, high-grade competitive issuance mid-week.
We continue to monitor the negative credit headlines that are coming out of Illinois, Chicago, Connecticut and New Jersey. To date, this has not deterred investors on a net-basis into the municipal bond market but continued negative headlines could impact the broader market in a rising-rate environment.
Additionally, that the oversight board in Puerto Rico will be reviewing the territory’s debt practices over the last decade could be the source of additional negative scrutiny over broader market practices in the industry. Stay tuned.
CREDIT FOCUS: UNCERTAINTY FOR TRANSPORTATION FUNDING:
by Joseph Krist, Partner
Recent U.S. House proposals for transportation funding in many ways reflected Trump Administration goals, in terms of reduced funding for many forms of mass transit. Their bill would zero out TIGER, make deeper cuts in transit capital grants and rescind $800 million in contract authority from state the U.S. Department of Transportation’s (DOT) federal-aid highway funds. Now, however, the Senate has begun to weigh in and its views set up a clash between two Houses on transit funding.
The Senate Appropriations Committee backed a bill to fund the U.S. Department of Transportation for the 2018 budget year that would increase TIGER infrastructure grants, support new transit capital starts and avoid rescinding any highway program funds. The Senate version would fund TIGER at $550 million and trim transit capital grants by less than half the House bill’s number. House appropriators called for a $659 million reduction from 2017 levels, while the Senate bill proposed a $280 million drop.
The committee, which reached its recommendation on a bipartisan basis, expressed it disagreement with the Administration's overall transportation philosophy clearly when they released their suggested bill. “While the committee fully supports additional spending for our nation’s infrastructure, it strongly disagrees with the administration's assertion that providing federal dollars for infrastructure has created, ‘an unhealthy dynamic in which state and local governments delay projects in the hope of receiving federal funds.’ Without federal investment in infrastructure, particularly in our nation’s highway network and transit systems, the ability to move freight across the country and the free movement of people between states with vastly differing abilities to fund infrastructure would be compromised.”
It added: “The committee is also concerned that the administration does not realize that state and local governments, through the statewide transportation improvement program planning process, already determine the ‘right level – and type – of infrastructure investment needed for their communities.’”
WHAT IT MEANS FOR YOU: So perhaps the healthcare process may be finally useful as a guide for how many of these issues will unfold. The House will reflect the more aggressive Trump Administration view while the Senate will ultimately serve as the moderating influence. Of course, we acknowledge that the end result for healthcare reform is a car wreck right now and that the budget process may not turn out much better. Planning your own budgets and transportation funding projects at the state and local level will require a more cautious approach given the very real uncertainty for policy in Washington.