Municipal bond credit quality remains relatively strong, as indications are still that upgrades are outpacing downgrades. S&P and Moody’s have both recently issued comments that corporate credit quality is weakening.
Per S&P, credits rated AAA to B- with negative outlooks or CreditWatch-negative assignments have been increasing, indicating a negative bias. Similarly, Moody’s estimates that the third-quarter downgrade-per-upgrade ratio for all US high-yield credit-rating revisions increased to over 2.25:1 from January to September 2019; and this is excluding downgrades that were for special events rather than fundamental weaknesses such as in financial operations or business position. The ratio is up from 1.09:1 for 2018.
Interest rates have been low and declining, and corporate and municipal issuers are taking advantage of the positive market conditions. Increased issuance sometimes indicates that market players think rates are attractive and are going to go higher. Municipal volume this year is expected to reach $400 billion, much higher than beginning-of-the-year estimates of $340 billion. The increase has occurred because municipal issuers are rushing to market with taxable municipal bonds to refund outstanding tax-exempt bonds. Remember, the Tax Cuts and Jobs Act eliminated municipalities’ ability to issue tax-exempt bonds to advance-refund outstanding municipal bonds. Continued economic growth here in the US; low unemployment, with employers having a hard time finding the workers they need; and inflation creeping up may all indicate higher rates going forward, notwithstanding the drag on the economy from tariffs and slowing European growth.
Is this the bottom for interest rates, despite low worldwide rates? See John Mousseau’s video, https://youtu.be/en4MJQiShzk, and his quick synopsis of third-quarter municipal market activity, https://www.cumber.com/cumberland-advisors-market-commentary-3q-2019-review-total-return-tax-free-municipal-bond/.
