Municipal Bond Sector Credit Outlooks

What are the Real Factors Driving Municipal Credit Now?

By Tom Kozlik
Head of Municipal Strategy & Credit
Hilltop Securities Inc.


On the heels of recent yield curve inversion activity, we present our outlooks for 11 municipal bond sectors.

Summary of findings:

  • We assigned two “Positive,” three “Stable,” three “Cautious,” and three “Negative” outlooks to our municipal bond sectors.

  • Common themes: 1) How issuers are reacting to the New Fiscal Reality and 2) rising costs of pension liabilities are obvious drivers of credit quality and are the leading reasons we assigned “Cautious” outlooks to the tax-backed sectors.

  • The Airport, Public Power, and Toll Facilities sectors are “Positive” or “Stable” but may encounter some weakness during the next economic downturn.

  • The Health Care, Higher Education, and Tobacco sectors have been experiencing a moderate to high amount of general credit deterioration and market conditions have generally resulted in an above average number of rating downgrades. As a result, each of these sectors have a “Negative” outlook.

  • We assigned a “Positive” outlook to the Housing sector primarily because the State Housing Financing Agencies (HFAs) proved durable through the recession and because many have been reinforced in recent years by adding supplementary financing options to their repertoire.

  • Water and Sewer issues are typically more insulated from economic cycles and they have built extraordinary liquidity cushions since the end of the Great Recession. We assigned a “Stable” outlook to the sector.

Below is the link to download the report. Please follow me on Twitter, @tomkozlik.

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The paper/commentary was prepared by Hilltop Securities (HTS) and Hilltop Securities Asset Management (HSAM). It is intended for informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product. Information provided in this paper was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute the views of HTS and/or HSAM as of the date of the document and may differ from the views of other divisions/departments of affiliate Hilltop Securities Inc. In addition, the views are subject to change without notice. This paper represents historical information only and is not an indication of future performance. Hilltop Securities Asset Management is an SEC-registered investment advisor. Hilltop Securities Inc. is a registered broker-dealer, registered investment adviser and municipal advisor firm that does not provide tax or legal advice. HTS and HSAM is a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH) located at 1201 Elm Street, Suite 3500, Dallas, Texas 75270, (214) 859-1800. Member: NYSE/FINRA/SIPC.