Ritika's Top Picks: Is Now the Time for Munis?

Municipal bond sales have surged this year and are showing few signs of slowing down in June. The amount of US state and city debt scheduled to sell in the next 30 days has climbed to almost $19 billion, the most since May 2022, according to data compiled by Bloomberg.

In this week’s Top Picks, we’ll discuss the outlook for muni bonds with Karel Citroen, Conning’s Head of Municipal Credit Research and Tom Kozlik, Hilltop Securities Head of Public Policy & Municipal Strategy.

Firstly, Conning ’s Karel Citroen , discusses the firm's latest annual evaluation of the credit conditions of all 50 U.S. states. The firm’s 2024 State of the States report assigns a “stable” outlook to the credit quality of all 50 U.S. states, an upgrade from last year’s “declining” view. State finances appear strong with healthy reserves, but inflation and rising costs are beginning to impact budgets, prompting the suggestion that states be judicious in spending plans:

“This year we went to stable from declining. That implies that we don't expect conditions to change very much from where they were last year in 2023. The declining outlook had factored in our assumption that credit conditions would slightly deteriorate last year and they did. We saw tax revenues come down year over year. For 2024 and heading into the 25 budget cycle, which we expect to start this summer. We expect moderate growth in terms of revenues and we're seeing some pressure on the expenses side. I think about inflation, how that's driving up to cost of certain things. And that could create some budget issues for states. Now, having said that it sounds kind of negative, but actually their reserves are at near old time highs for many of the states. So they definitely have a cushion to manage through some of these headwinds.”

For Hilltop Securities Inc. ’s Tom Kozlik , the most important issue facing muni bonds was a surprise. The firm released its 2024 municipal bond analyst survey and discussed how infrastructure has overtaken pensions as the main trend driving the market.

“And the survey results show that 44% of those participating chose infrastructure as being the leading or most important issue/trend facing the municipal bond market today. Why was infrastructure so heavily considered?

And was infrastructure a leading theme in past surveys?

Yeah, that was one of the surprises, if not the surprise to me.

On the one hand, infrastructure pretty much every year has gotten a good amount of attention, probably around that level.

That being said, it's never been number one, and it's never even been the first or second.

I think that one of the big reasons of why it's always part of the survey results is just because municipal bonds are synonymous with infrastructure.

And so that's one of the reasons why I think that infrastructure is always an important part of how it is at the analysts look at the municipal bond market.”