While the economic impact of tariffs may manifest some regional differences, states are generally in solid financial shape to withstand challenges. (ÃÛ¶¹ÊÓƵ)
The rise in volatility comes as the policy seesaw with respect to tariffs and spending cuts continues in DC, raising the uncertainties on outcomes and implications for financial markets.
Munis have not been immune to the rising volatility. After a strong February, they are underperforming Treasuries and IG corporates in March and on a YTD basis. HY munis are also showing softer performance after a two-year solid run. In contrast, taxable munis, while down slightly in March, are one of the best performers YTD within US fixed income markets, as they have benefitted most from the Treasury rally, given their relatively longer duration.
We remain constructive on IG muni tax-exempts from a longer-term perspective as yields remain attractive, especially for longer maturities. Munis continue to offer significant spread over Treasuries and IG corporates on a tax equivalent basis in the 15-30yr maturity band.
While long maturity muni yields are attractive, there are headwinds in the near term. In addition to the prospect of higher rate volatility, muni technicals are likely to be weaker in the March-May period. We expect supply to remain elevated (issuance is 20% higher than last year on a YTD basis) and redemption demand to weaken. Given that dynamic, some defensive allocation to shorter maturities seems reasonable.
While fiscal policy remains uncertain, the likelihood of some cuts to Medicaid has risen. Several not-for-profit private colleges are also facing federal funding challenges. Bond spreads in these sectors may not be fully reflecting the risks, especially for lower rated obligors. In contrast, while the economic impact of tariffs may manifest some regional differences, states are generally in solid financial shape to withstand challenges.
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