The pandemic and its consequences have forced investors to revisit the fundamentals of municipal bonds. Below, we examine these fundamentals, which we think can provide relative stability even in the most volatile of economic cycles.
When the pandemic began, we predicted that municipal bonds would hold up better than they did during the global financial crisis (GFC), which put a severe strain on municipal budgets for several years. Importantly, though, even during the 2009-10 economic slump, municipal credit held its own, with no appreciable increase in defaults. What made us think the market would hold up even better when faced with the economic fallout from the pandemic?
It came down to these three factors, which we think are important to take into account when analyzing municipal bonds—the high-grade portion of the market in particular:
Breadth, diversity and stability of municipal revenue
Generally conservative financial operations and balance sheet strength