Despite GOP Bill, Muni Market Keeps Faith in U.S. Rescue for States

Wall Street appears confident that Washington won’t abandon states and cities that are veering into what may be the worst financial crisis in decades.

A day after Senate Republicans released a $1 trillion plan that provided no new aid to help governments contend with the deep budget shortfalls left by the pandemic shutdowns, analysts said they still expect such help to be included in any compromise with Democrats.

The expectation that states and cities would receive an influx of funds has helped support the $3.9 trillion municipal-bond market, where a steady flow of cash has driven yields to the lowest in more than sixty years.

On Tuesday, the prices of some top-rated debt edged higher, with 10-year yields holding at just 0.68%. So did the bonds of California, Illinois and New York’s Metropolitan Transportation Authority, all of which are feeling the hit of the recession.

Kathleen McNamara, senior municipal bond strategist at UBS Global Wealth Management, said the trading prices show that analysts and investors expect that states and cities will ultimately receive some financial assistance. She said Wall Street is anticipating between $400 billion to $500 billion of such aid, roughly half what Democrats included in the House bill that passed in May.

“Most market participants think there will be a compromise,” McNamara said. “We have zero versus a trillion. The final outcome is going to be somewhere in the middle.”

Despite GOP Bill, Muni Market Keeps Faith in U.S. Rescue for States

States alone may face shortfalls of $555 billion through 2022, exceeding those left behind after the last recession over a decade ago, according to the Center on Budget and Policy Priorities. Cities and counties are also forecasting large deficits.

Without help, governments will be forced to cut spending, fire employees or raise taxes, all of which could further slow any economic recovery.

But Bank of America Corp. analysts have said they expect as much as $400 billion in aid by the third quarter, while Morgan Stanley has forecast they will get as much as $500 billion.

Eric Kazatsky, municipal strategist for Bloomberg Intelligence, said that he expects Congress to meet somewhere in the middle of the two parties’ proposals, which would put the aid in line with what banks have been forecasting.

He said the devastating budget figures released by states and cities so far, paired with the spike in virus cases across the country, will worsen the fiscal situation facing municipalities. He said they may need even more than the $1 trillion House Democrats proposed in order to “get everybody on their feet again.”

“I’m not sure if even that’s enough,” he said.

©2020 Bloomberg L.P.

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