In November, Congress enacted the Infrastructure Investment and Jobs Act (IIJA) which appropriates an additional $360 billion in infrastructure aid for traditional municipal issuers over five years.
11 ARPA funds may last a bit longer and prove more fungible than originally expected. 10 In practice, states have spent the funds cautiously and the Treasury and federal courts have loosely interpreted spending restrictions. The funding is meant for pandemic-related needs, including broadband, water, or sewer infrastructure, and it is intended to last for the duration of the pandemic. The income-support and direct aid provisions in both bills built on $2.4 trillion in funding in the March 2020 CARES Act and buoyed state and local revenues and liquidity during 2021 (See Still Work to Do for Many Municipal Issuers).ĪRPA delivered $628 billion for states, local governments, and k-12 public schools through 2027 (Figure 6). Congress enacted the Coronavirus Response and Relief Supplemental Appropriations Act in late December 2020 ( CRRSA, $900 billion) and the American Rescue Plan Act in March 2021 ( ARPA, $1.9 trillion). Extraordinary levels of federal aid for taxpayers and municipal issuers have also supported credit fundamentals. A record 54 percent of defaults were in the retirement/nursing home sector (Figure 1). All but $500 million of this amount was concentrated in higher risk sectors. 1 A total of $6.8 billion in par was in default (excluding Puerto Rico debt).
That’s lower than in 2020 (72 defaults) but higher than during the 2017-19 period. There were 57 municipal defaults year-to-date through November 2021. Municipal credit fundamentals look strong Market Strengths We favor taking modestly more credit risk in short maturities and opportunistic buying if ratios or spreads widen. However, periods of modestly weaker demand and increased supply are possible if the Federal Reserve (Fed) raises rates as expected, issuers continue to find value in tax-exempt refundings and taxable advance refundings, and the market experiences bouts of outflows and weak demand. Congress continues to debate higher tax rates, and new money supply is unlikely to grow meaningfully. We expect no significant movement in ratios or spreads in 2022. Strong inflows coupled with limited tax-exempt supply led to historically low ratios and tight credit spreads in 2021. In terms of market technicals, 2021 was characterized by strong municipal bond fund inflows (demand) and limited growth in supply. However, the benign credit environment may weaken later in the year given emerging risks, including those related to climate change, inflation, labor shortages, disruptions to public schools, a more entrenched remote work culture, and a return to a less reliable federal funding environment, especially if Republicans retake the House or Senate in the November 2022 midterm elections. The Omicron variant presents manageable credit challenges. On the credit front, the market is characterized by low default rates, an upward ratings bias, strong revenue growth, significant federal support, and recovering pension funds. However, the pace of credit improvement is likely to slow throughout 2022, and there is more potential for weaker demand and increased bond supply in 2022 than in 2021. The municipal market enters 2022 on strong credit footing and against a supportive technical backdrop. From a strong year-end starting point, municipal bonds will encounter risks ahead.
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