Muni Payrolls Decline, Highlighting Austerity

Muni Weekly Monitor

Muni Payrolls Decline, Highlighting Austerity

A deep dive into what jobs data associated with COVID-19 says about austerity at the state and local government levels.

Municipal market returns ground higher last week, supported by strong flows into municipal mutual funds and seasonally high coupon and principal reinvestment which offset an elevated calendar. This week we take a deeper dive into jobs data associated with COVID-19 economic impacts to assess varying degrees of austerity at the state and local levels.

The Muni Market Posted Positive Returns Last Week

AAA municipal yields moved lower in intermediate and long maturities, supported by a rally in Treasury rates and robust fund flows. The Bloomberg Barclays Municipal Index returned 0.56%, while the HY Muni Index returned 1.07%. The outperformance in Treasuries resulted in increasing Muni/Treasury Ratios, particularly at the short end.

Muni Technicals Strengthen, Supported by Robust Fund Flows

Municipal mutual funds reported $2.8 billion of inflows, a fifth consecutive week of inflows. Long-term funds recorded $2.0 billion of inflows, HY funds recorded $572 million of inflows and intermediate funds recorded $1 billion of inflows. Year-to-date (YTD) municipal fund net outflows now total $11.5 billion. In addition to robust fund flows, the municipal market typically sees seasonally high coupon and principal payments in June and July, which can drive reinvestment into the asset class.

The elevated municipal fund inflows and coupon/principal reinvestment offset an elevated supply calendar. The muni market recorded $11.3 billion of new-issue volume last week, up 10% from the prior week. YTD issuance of $173 billion is 17% above last year’s pace, primarily driven by taxable supply, which is over 3x that of last year’s levels while tax-exempt supply remains below last year’s levels. We anticipate an approximate $12 billion calendar next week, led by $1.9 billion from the New York State Urban Development Commission and $794 million in taxable Texas Transportation Commission transactions.

This Week in Munis: Muni Payrolls Decline, Highlighting Austerity

Following the better-than-expected jobs report released on June 5, this week we are highlighting state and local payroll declines that we have observed across the nation. As the economic impact of COVID-19 roils state and local finances, austerity comes into focus. Given state and local financial disclosures are frequently dated, Western Asset’s credit research team utilizes many real-time tools to assess changing credit conditions, one of which is monthly state and local payroll reports released by the Bureau of Labor Statistics (Exhibit 1).

Exhibit 1: State and Local Payroll Growth

Source: Bloomberg, BLS, Western Asset. As of 31 May 20. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


In May, state and local payrolls declined 662,000 to 18.6 million, down 3.6% month-over-month. Considering payroll declines in March and April, states and local municipalities reduced employment by approximately 1.6 million individuals, which is approximately 7.9% below February highs, and steeper than prior recessions. Looking at the state-level detail as of April 30, Michigan, Vermont and Hawaii observed the largest payroll declines, consistent with the manufacturing and tourism strain in those economies.

While not great for growth (state and local spending accounts for approximately 14% of GDP), spending reductions and payroll cuts are what we have seen from states and locals to meet their obligations in the past, and what our base case calls for going forward. However, we remain cautious on local general obligations and downstream entities that could receive lower state funding due to budgetary stress.

Exhibit 2: Municipal Bond Yields and Index Returns

Source: (A) Muni Yields: Thomson Reuters Money Market Ddirectory; Treasury Yields: Bloomberg. As of 12 June 20.  (B) Bloomberg. As of 12 June 20.  Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


Exhibit 3: Tax-Exempt and Taxable Municipal Valuations

Source: (A) Bloomberg, Western Asset. AAA, AA, A, BBB Corporate Indices. As of 12 June 20. (B) Bloomberg, Western Asset, Taxable Muni Index Corporate comparable used is the Long Corporate (ex. BBB) to better align credit quality and duration. As of 12 June 20.  Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


The Bureau of Labor Statistics (BLS) is an American government agency tasked with collecting and disseminating a range of economic and employment data.

Yield-to-Worst (YTW) is the yield generated assuming a bond is redeemed by the issuer on the least desirable date for the investor. Yield-to-Worst for the asset class is calculated as the weighted average yield to worst of the individual constituent bonds.

A spread is the difference in yield between two different types of fixed income securities with similar maturities; usually between a Treasury or sovereign security and a non-Treasury or non-sovereign security.

Seasonal adjustment removes the effects of recurring seasonal influences from economic series. Seasonally adjusted data are referred to in a number of ways: adjusted, seasonally adjusted, and SA. Likewise, data that have not been seasonally adjusted are often referred to as not seasonally adjusted, unadjusted, or NSA.

COVID-19 is the World Health Organization's official designation of the current novel coronavirus disease. The virus causing the novel coronavirus disease is known as SARS­CoV-2.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

The Bloomberg Barclays Municipal Bond Index is a rules-based, market value-weighted index engineered for the long-term tax-exempt bond market.

The Bloomberg Barclays Municipal High Yield (HY) Index is market value-weighted and designed to measure the performance of U.S. dollar-denominated high-yield municipal bonds issued by U.S. states, the District of Columbia, U.S. territories and local governments or agencies.

The Municipal/Treasury Ratio (M/T ratio or muni-Treasury ratio) is a comparison of the current yield of municipal bonds to U.S. Treasuries. If the yield on AAA munis is 1.5% and the yield on the 10-year Treasury is 2.0%, the ratio is 0.75. The higher the muni-Treasury ratio, the more attractive munis are relative to Treasuries.

A credit rating is a measure of an issuer’s ability to repay interest and principal in a timely manner. The credit ratings provided by Standard and Poor’s, Moody’s Investors Service and/or Fitch Ratings, Ltd. typically range from AAA (highest) to D (lowest). Please see,, or for details.

One basis point (bps) is one one-hundredth of one percentage point.

High yield (HY) bonds, also called junk bonds, are bonds with below investment-grade ratings (BB, B, CCC for example) and are considered low credit quality and have a higher risk of default.


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