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 focus 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 transportation sector was the focus of SNWAM analysts’ June municipal sector review. Based on our analysis of the credit quality, supply and pricing of the three components of the transportation sector, we recommend an overall neutral weighting to the sector.
The municipal transportation sector is broad. It includes the airport and toll road subsectors, as well as other transportation projects, including seaports, mass transit facilities and debt backed by highway-related revenues and federal transportation grants. The transportation sector represents about 12% of the Bank of America Merrill Lynch intermediate municipal benchmark index and is its third largest sector. The SNWAM economic outlook assumes a continued expansion of the U.S. economy, albeit at a slower rate of growth versus past economic cycles. Within this view we continue to see robust fundamental trends supporting toll roads, as 2015 was the most heavily traveled year by drivers. Miles driven during the year were up a healthy 3.5% from 2014, a trend that has continued so far this year as YTD miles are up 3.7%. Increased driving is fueled by economic growth and relatively low gas prices. The relative supply outlook for the transportation sector is constrained due to limited growth in motor vehicle fuels taxes, which are the main sources of transportation related debt at the state and federal levels. Motor vehicle fuels tax growth is slowing due to increased fuel efficiency, higher mandated corporate average fuel economy (CAFE) standards and limited political will to increase gas taxes. Overall, SNWAM is neutral on the relative supply outlook due to the lack of a planned large-scale state or federal government program to spur transportation related spending. Lastly, the sector does appear to be relatively cheap compared to the overall index due to the presence of credits with idiosyncratic risk. SNWAM is reviewing these credits on an individual basis to determine their relative attractiveness and risk/reward characteristics. Overall, SNWAM has a neutral outlook on the transportation sector due to its neutral credit fundamentals and limited supply outlook, though coupled with its potentially cheap relative value security selection opportunities. Stay tuned to our weekly bullets for additional security selection analysis.