Investor sentiment about local government borrowers recovering but mixed

While investor interest in local government debt remains on the mend after bottoming out late last year, some cities are faring better than others, according to University of Chicago Center for Municipal Finance data.

The Harris School of Public Policy’s CMF launched the indices in 2018 to track secondary market general obligation bond values of 32 cities, 14 counties, and five school districts, updating them weekly.

A dive into individual borrowers offers a glimpse into themes impacting local governments amid the ongoing COVID-19 pandemic recovery and persistent uncertainties, said Justin Marlowe, research professor at the Harris School and author of the February CMF Muni Investor Sentiment Report.  

Last November, the CMF Muni Index had fallen 60% year-over-year, underscoring the municipal bond market’s worst year in decades amid rising interest rates and steep mutual fund outflows. The index had recovered roughly one-third of the value lost during the 2022 decline by earlier this month and has seen further gains this week.

“The trends definitely suggest a recovery,” Marlowe said in an interview. “We’ve seen more clarity on the path the Fed is going to take on rates and that seems to have stabilized” the market, while “the outlook on supply is thin” all of which has bolstered market demand. The latest data “allows us the opportunity to peel back the layers and track who has bounced back faster” than others.

Earlier in the pandemic, bond values showed a greater divergence among local government issuers tracked but that has reverted to pre-pandemic levels.

All remain down compared to their performance a year ago but there are standouts on both ends of the spectrum.

Investors are more bullish on the metroplex cities of Dallas and Fort Worth, several Arizona cities, and Chicago and its school districts, according to the trajectory of their bond values.

Sentiment is more negative toward Houston/Harris County, Charlotte/Mecklenburg County, Seattle/King County, San Francisco, Boston, and Memphis. Some have common features— being either coastal hubs or white-collar job centers — and face more pandemic uncertainties, Marlowe said.

Phoenix, Tucson and Mesa all saw year-over-year index declines of less than 20% as of late January. “In other words, investor views on these cities improved much faster than others against the backdrop of widespread pessimism and uncertainty,” the report noted.

Dallas, Arlington, Fort Worth and Tarrant County saw year-over-year changes in the top one-third, with their overall index values in the top half of their peer groups as of late January. Phoenix is down just 7% down from the previous year while Tucson is down 19%, Dallas is down just 21%, and Chicago down 23%. Tarrant is down just 1% and CPS 13%.

Chicago and the Chicago Board of Education headed into the pandemic at the bottom of the barrel compared to peers being tracked. CPS is the top year-over-year school performer among districts and the city was a top 10 performer. “Chicago’s recent credit rating upgrades are consistent with this comparatively strong index performance,” the report said.

Chicago’s GOs drew a round of rating upgrades last year with Moody’s Investors Service being the most notable: lifting the city out from a junk label.  Chicago Public Schools has drawn a series of upgrades over the last few years as it benefitted from an infusion of new city and state funding and COVID-19 federal relief helped maintain the positive momentum. Three of its four ratings, however, remain in speculative-grade territory.

Marlowe sees ongoing work-from-home risks as a common theme based on the weaker performance of Houston/Harris County, Charlotte/Mecklenburg County, Seattle/King County, San Francisco, Boston and Memphis. Houston is down 41%, Charlotte 24%, Seattle 39%, San Francisco 46%, Boston 43%, and Memphis 47%. Houston schools were down 53% and Harris County 46%.

“High concentrations of workers in ‘portable’ industries like tech, financial services and logistics, coupled with a flight from expensive real estate, continue to dampen investor sentiment toward these localities,” Marlow said in the report.

The data provides some evidence that suggest investors view positively borrowers where tourism and convention business have seen stronger improvement.

The trading data, which sets January 2018 as the baseline, was designed to provide government officials and other market participants a view of what the market thinks of an individual local government through its trajectory and the ability to compare to others to discern potential individual, regional, issue, and sector-wide economic themes that can help shape decision-making.