Municipal Bond Market Rests on Solid Foundation Amid A Rocky Landscape


Executive Summary

  • Liquidity is ample in the muni market, with potential disruption from retail flight or an infrastructure-related supply surge.
  • The fundamental credit outlook for state and local municipalities is stable. Tax revenue growth from a stronger economic and housing market is offset by rising pension and Other Post-Employment Benefits (OPEB) liabilities as well as growing impact of direct lending. Revenue bond issuers are the most creditworthy.
  • The economic and financial crisis in Puerto Rico is complex and non-systemic to the broad $3.7 trillion market.
  • Regulatory changes loom with 1) the disallowance of muni bonds as High Quality Liquid Assets (HQLA) 2) Securities and Exchange Commission (SEC) proposed liquidity categorization rules for open-end mutual funds and ETF’s 3) “mark-up disclosure” rules in development at the Municipal Securities Rulemaking Board (MSRB).
  • Anemic economic growth and capital needs for infrastructure have prompted countries in Europe and Asia to develop local municipal bond markets.

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