The market for state and local government debt is becoming “less forgiving,” according to BlackRock Inc.’s Pat Haskell, who leads the firm’s municipal bond group.
State revenues are softening, and rainy day fund capacity has declined for the first time since the Great Recession, he wrote in his second quarter outlook report released Wednesday. The end of pandemic-era stimulus programs, slowing tax collections and rising costs are all adding to the weakness.
The combination is “driving reserve drawdowns and structural imbalances, contributing to increased downgrades and wider credit gaps,” he wrote.
At the same time, several states including Texas and Florida are considering property tax reductions, often without plans to replace the foregone tax revenue. That’s adding “another layer of uncertainty” and potential fiscal strain.
“Property taxes are an important, stable form of revenue that we really like underpinning some of the credits we have,” said Haskell.
For investors, the confluence of factors means the muni market is becoming “a more issuer-specific” credit environment in his view.
BlackRock is maintaining higher liquidity levels to allow it to be “opportunistic” and wait for “aberrations” in the market, Haskell wrote. His team prefers essential service revenue bonds, such as for transportation and housing, over general obligation bonds, which could be more exposed to changing policy and budget constraints.
“We definitely want to remain very vigilant around all the unknowns that are out there, given what’s going on from a macro perspective and a fiscal perspective,” he said. “The details underneath the hood are changing rapidly.”
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