Municipal Bond Outlook: Recovering at Different Speeds


  • Fiscal policy is likely to remain supportive of municipal credit in 2021, although we anticipate downgrades for certain issuers acutely affected by the COVID-19 pandemic.
  • Tax-exempt municipal supply could surge if Congress restores tax-exempt advance refundings.
  • We see opportunities in lower-rated municipal credits, although bottom-up research and liquidity management will be key.

2020 was a strong year for municipal bonds, with the municipal market showing resilience after a difficult first quarter. While the economic backdrop remains challenging, we believe the U.S. economy is likely to rebound strongly in 2021, driven by vaccine rollouts and continued fiscal and monetary support. Even with a strong recovery, interest rates are likely to remain low, while inflation should stay below the Fed’s long-term symmetric target of 2%.

Much of this optimism is already priced into equity and credit valuations, although pockets of value still exist within the muni market. With Democrats now in control of both the White House and Congress, the coming year could bring material changes to the municipal market.

State and local government finances not as dire as feared

Despite economic stagnation and periodic lockdowns throughout much of the past year, state and local credit has held up relatively well throughout the pandemic – bolstered by monetary and fiscal support, as well as solid market fundamentals (see our blog “Making Sense of the Move in Munis”):

  • Through September 2020, combined sales and income tax collections were down just 1% on a year-over-year basis in the U.S. – far less than original estimates.1
  • Since the first quarter of 2020, personal income tax is down 1.6% compared with the same months in the previous year, but sales and use tax revenues are up.2
  • Local government revenues are also holding up well and have been buoyed by a surprisingly resilient housing market, which bodes well for property tax collections. In the latter half of 2020, property values saw monthly increases of 9% over the prior year.3

Figure 1 is a line graph depicting state and local tax revenues over a 10-year period. Revenues are shown to have gone up steadily until 2020, when they dipped briefly but have since recovered. Image Pop Up