The negative economic and fundamental credit consequences from COVID-19 are raising concerns among municipal investors. As the unfortunate effects of the pandemic endure, municipal entities are faced with growing revenue shortfalls as sales and income tax revenues decline and social service costs spike in sympathy with demand. Some of the largest municipal issuers and state governors have made public appeals for additional federal aid with the growing size of losses, which has caught the attention of the market, prompting questions surrounding whether the current level of federal aid is enough.
We do not expect the pandemic to result in wide-scale defaults among municipal credits. The vast majority of credits have underlying strengths, such as extensive taxing power and independent rate setting authority that support flexibility to continue making debt service payments. That said, the potential for rating agencies to downgrade certain credits is high as changes in revenue and cost profiles will likely persist across all sectors and worsen in the coming weeks and months. With this level of economic disruption, weaker municipal credits have a propensity to be stressed and even default. However, we are confident that the overall credit picture for investment grade municipal bonds remains solid.
Sherri Tilley, investment strategist, Dan Barton, head of municipal bond research and Dan Rabasco, head of municipal bonds, Mellon.