July 20, 2020 – Morgan Stanley waded into the Congressional prediction sweepstakes today, predicting that Congress will extend up to $600 billion in federal aid to states, local governments and hospitals; as well as authorize advance refundings.<\/p>\n\n\n\n
Under the enacted Tax Cuts and Jobs Act of 2017, issuers were barred from issuing new tax-exempt bonds to refinance bonds with call dates beyond 90 days. The reinstatement of advance refundings is expected to cost the Federal government $14 billion in lost revenues.<\/p>\n\n\n\n
If the “Base Case” prediction ($364 – 614 billion in value) comes to pass, Morgan believes the market will be on track for “moderate outperformance”.<\/p>\n\n\n\n
Under a “Bull Case” scenario ($630 in value), additional aid could be fothcoming for higher education and transit authorities, which combined with stimulus checks for consumers, could herald a “V-shaped” economic recovery, further improving municipal credit.<\/p>\n\n\n\n
Morgan Stanley said two provisions heavily sought after by Congressional Democratic caucus – the reinstatement of Build America Bonds and the removal of the State and Local Tax (SALT) cap – do not have bipartisan support and are unlikely to pass.<\/p>\n\n\n\n
Note, the stimulus described above relates to provisions directly impacting municipals. There is considerable bipartisan support to assist Americans impacted by COVID-19 through either direct stimulus payments and renewing enhanced federal unemployment assistance, albeit at a rate lower than the current $600\/week benefit. <\/p>\n\n\n\n
Experts say the $600\/week benefit represents a higher monetary sum than actual wages earned for 70% of unemployment benefit recipients, potentially impeding economic recovery by disincentivising workers to return to work.<\/p>\n\n\n\n
News reports indicate President Trump is heavily promoting a payroll tax cut, although Congressional support for the proposal has been tepid.<\/p>\n\n\n\n
While issuers may welcome a return of advance refundings, two portfolio managers BuyMuni spoke to indicated a sudden, large influx of new tax-exempt paper (even if it’s for refunding purposes) may result in higher spreads for the remainer of 2020. While over the long-term, munis remain an asset class with attractive risk-return profile, higher interest rates will be unwelcomed at a time where states and local governments are suffering budget stress.<\/p>\n\n\n\n
Contact Kyle Skinner at KSkinner@buymuni.com.<\/p>\n","protected":false},"excerpt":{"rendered":"
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