Displaying items by tag: credit
The muni market is doing great, at least on paper that is. Muni bonds have seen an absolutely furious rally over the last few months, which has driven yields to the lowest level since the 1950s. However, many municipalities have huge budget deficits, so the trick is to buy prudently. Eaton Vance published a piece with a state by state analysis of financial health, since the pain of tax revenue losses is not spread evenly. There are multiple ways to look at the info. The states who will see a 20%+ fall in revenue include: Idaho, Wyoming, North Dakota, Oklahoma, Missouri, New York, Alaska, Maine, West Virginia, Louisiana, and New Jersey. The top ten states for creditworthiness (meaning the most creditworthy) according to Eaton Vance are Idaho, Wyoming, South Dakota, Utah, Nebraska, North Dakota, Tennessee, Iowa, Virginia, and Minnesota.
FINSUM: New York and New Jersey are the most alarming ones on this list, since they are seeing big revenue falls and were already in quite poor financial condition. Illinois is obviously troubling too, as it is dead last in creditworthiness and likely to see a 13%+ fall in revenue.
Muni bonds have been on a relentless rally. Any advisor is surely aware of this because there is likely a lot of their client’s money in the space. The inflows have been so sharp, and the price action so swift, that average ten-year yields in munis are at 0.7%, the lowest since the 1950s. At the same time, the COVID pandemic has decimated local and state budgets and there is a $1 tn budget deficit. Worse, the federal government has no clear plans in place to help local and state governments, meaning such municipalities may not be bailed out any time soon.
FINSUM: So on the one hand you have soaring prices, and on the other, significantly eroding credit quality. In any normal circumstance this would be seen as a bubble. However, given that Washington does seem likely to offer some aid to local governments, a meltdown will probably be avoided—but not without some volatility along the way.
While some are saying that we are in “TINA” mode with equities (i.e. there is no alternative), high yield bonds have been seeing a big influx of demand. Because dividends are drying up in the stock market, high yield bonds are becoming increasingly attractive, and Bank of America thinks they are going to do well. They point out that yields in some bonds are much higher than similar yields on equities in the same sector and they expect spreads to tighten in the coming quarter. “While the easy money was last quarter, we still see many tailwinds to nudge high-yield spreads tighter in Q3...Markets should be treated to plenty of positive data surprises now that economies are exiting their lockdown hibernation…an essential ingredient for leveraged credit to perform.”
FINSUM: This seems like a reasonable call, but we think the positive data surprises might be a stretch. That said, yield-hungry investors will likely keep the high-yield space humming along.
There is alarm growing among muni bond investors as credit quality continues to deteriorate. During COVID there has been a widening gap in pension deficits among municipalities, and investors are keeping a close eye because it is leading to deferred pension payments. This is troubling for a number of reasons. Firstly, it digs municipalities into a bigger hole because they must pay interest on deferred payments; and secondly, it spooks bond markets and makes it harder for them to access liquidity. In other words, deferred pension payments, such as the nearly $1 bn one New Jersey elected to do in May, dig muni issuers into a deeper and deeper hole.
FINSUM: Pension recipients are very likely to be considered senior to bondholders, so this is a very alarming situation for investors.
One of the best ways to watch the damage to the economy is to monitor the performance of consumer debt. Auto loans, student loans and beyond give a clear indicator of the health of American finances. Right now, the data is looking bad, reinforcing why this might be a long and difficult recovery. According to the WSJ, “Americans have skipped payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit the U.S … The largest increase occurred for student loans, with 79 million accounts in deferment or other relief status, up from 18 million a month earlier. Auto loans in some type of deferment doubled to 7.3 million accounts. Personal loans in deferment doubled to 1.3 million accounts.” The total of deferments is triple the number from the end of April. Lenders, who have generally been accommodative to this point with borrowers, expect delinquency to soar later this year.
FINSUM: You cannot have 50m people—roughly a third of the US workforce—lose their jobs and not have any repercussions. This is the kind of data that makes stock indexes look rather ludicrous right now.