The municipal bond market showed more signs of progress in October, albeit unevenly – a persistent market narrative that creates opportunities for the disciplined and informed.
State revenues growing despite property tax declines
The macro economic picture for state governments generally continued to move in a positive direction as tax revenues saw double-digit growth (10.8%) year over year in the second quarter, according to the Rockefeller Institute. This was slightly revised from the preliminary number we mentioned in our August commentary. The growth resulted primarily from an increase in income and sales taxes, although total states’ revenues lag behind 2008 totals for this same period.
Local governments continue to see property tax revenue decline from prior periods. In the second quarter, property tax revenues fell 1% year over year, per the Rockefeller report. Local property tax receipts have fallen for the last few quarters forcing local governmental units to pare their budgets. This trend will continue in the months ahead.
Municipal market still attractive for some, challenging for others
Municipal bond yields moved slightly higher in the latter part of October. An increasing new issue supply added to dealer inventories as investor demand flattened a bit from prior weeks. Market liquidity is a challenge at times, especially for average and weaker credits. This dynamic will not change soon, in our view, and generally is a negative for total return investors and a positive for the income oriented investor.
Chicago shows leadership on municipal financial challenges
Timely and complete municipal disclosure is slowly improving, but much work is yet to be done in this area.
Two weeks ago, I attended the City of Chicago’s first Chicago Investor Conference – which was also a first for me in over 30 years in the municipal bond industry. To my knowledge, I do not recall a municipal issuer hosting such a forum designed to inform investors and other industry stakeholders on the state of operations and finances. Mayor Emanuel spoke openly about how the city is trying to deal with the critical issues of improving operational efficiencies, union pensions, lengthening the school day and the effect of state finances on the city’s budget.
Clearly, the city has financial challenges in front of it, but this event is a positive signal to the marketplace and a message to other issuers of what is needed and expected by investors today. I applaud Chicago for showing leadership on this critical issue.
Ronald P. Bernardi
President and CEO
Bernardi Securities, Inc.
November 1, 2011