SNW Sector Analysis – Neutral on State General Obligation Bond Sector

As part of our investment process, SNWAM analysts make weighting recommendations for each sector in the municipal bond market, in addition to reviewing each credit held in SNWAM managed portfolios. Each month, a specific sector is the subject of an in-depth review, which includes an analysis of the sector’s relative credit quality, issuance trends and pricing relative to other sectors in the muni market. The State General Obligation sector was the focus of SNWAM analysts’ April muni sector review. 

Based on our analysis of credit quality, supply and pricing, we have applied a neutral weighting of the State G.O. sector relative to other sectors in the Muni Market. While this recommendation is in line with our most recent review of the sector in December 2015, our updated outlook noted the uneven growth of the economy and resultant slowing in the level of revenue growth. States are now entering the critical stage of the Fiscal 2017 budget season as they look to balance budgets in time for the start of the new fiscal year on July 1. The National Association of State Budget Officers (NASBO) reports that budget proposals submitted by most governors reflect the continued improvement of the fiscal health of most states since the recession, but there are still outstanding issues and systematic risks in the State G.O. sector. As we have indicated previously, a key to sector credit quality has been the ability of states to restrain spending and build reserves. If revenue growth continues to decline, increases in cost pressures from items such as K-12 education or pension liabilities present risks to the sector, particularly as the level of accumulated reserves is less than amounts accumulated in prior periods of economic growth. Given this outlook, we prefer high quality, highly rated states such as Georgia, and are avoiding those that are facing balance sheet pressure such as Illinois.

Sources: SNWAM Research, NASBO