Experts say muni market was hit unevenly by COVID-19 but came out OK

Bonds

Municipal bond industry leaders speaking Wednesday at The Bond Buyer’s National Outlook Conference said the coronavirus pandemic left the municipal bond market in generally decent shape after causing disruption in some sectors while leaving others virtually untouched.

“I think one characteristic of this pandemic, in addition to all the other horrible parts of it, is that it hit unevenly,” said Ted Sobel, head of public finance at Ramirez & Co. “As opposed to 2008 or 2009, which was a fairly nationwide recession that hit a lot of people on Wall Street and Main Street, this has been more like a series of tornadoes or storms that have spared some houses.”

A healthcare worker administers a Pfizer COVID-19 vaccination in West Virginia earlier this month. The pandemic remains the dominant driver of the municipal bond market.

Bloomberg News

The pandemic’s effects on the muni market were both widespread and permanent, said Sobel and other members of a panel featuring leaders from underwriting firms.

Natasha Holiday, managing director at RBC Capital Markets, said the pandemic added market risk for large, dense populated cities are at risk, particularly headline risk. She said the economic fundamentals were still the same, but that there were uncertainties about whether people and jobs were going to come back or the ability to use public transportation as a factor.

“But I remember 9/11,” Holiday said. “I think about 9/11 and I think about the fear that businesses had that corporations and people would not come back to downtown in New York.”

But they did return, she said, adding “the reality is that young people are going to come to cities like New York and other urban cities to pursue an opportunity to start their careers.”

Holiday said President Joe Biden’s $2 trillion infrastructure plan has a lot of positives that focus on both physical infrastructure initiatives and social infrastructure.

“I think that investment in those areas will bode well for our industry,” she said. “We don’t expect this will have any negative impact from an issuance standpoint. In fact, it should be helpful to spur more issuance.”

Jeanny Pak, managing director at UBS Financial Services, said the change in the political climate has made support for infrastructure spending a real possibility now, and cited the movement on the Gateway Tunnel project and congestion pricing for the New York Metropolitan Transportation Authority.

“I think in addition to the funding, I think there are going to be more approvals that are quicker to allow these projects to get going and this will have an impact on the municipal market and a lot of infrastructure that’s going on around the country,” she said.

Sobel added that while it was too early to say what the proposed plan will eventually look like, he felt it would have a net positive effect on muni issuance.

“It may take a little while. Just as with the American Rescue Plan, I think governments around the country are trying to figure out exactly what it means for them and what the timing is,” he said. “So there may be relatively short-term delay in issuance, but a net long-term benefit.”

All three believe it was possible that Congress would restore tax-exempt refundings if it was attached to a larger bill such as the new infrastructure spending plan.

The panelists said they expect municipal bond issuance for the rest of 2021 to be strong, but lower than the previous year.

Sobol said Ramirez has a rather robust forecast for 2021 muni volume.

“I think we have a little less than last year in part because in 2011 issuance was quite low so as those bonds come to their 10-year calls dates there just aren’t as many as there have been in previous years,” he said.

Both Holiday and Pak said their firms’ forecasts were more conservative on this year’s issuance, at $425 billion and $430 billion, respectively.

All three saw Environmental, Social, and Corporate Governance, or ESG, focused issuance continuing to rise in the years ahead, with Pak saying ESG issuance is up about 72% from last year.

“It’s a tremendous increase. I think the social bonds have been the least growing, but given the environment I do think that this will become more of a focus for state and local governments.”

She said she believes ESG issuance will continue to grow as new funds are being aimed at young, interested investors.

Michael Scarchilli, editor-in-chief of The Bond Buyer, led the online panel discussion.

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