Muni Bond Update: Credit Quality Still Looks Strong

While 2023 has started on shaky ground for the municipal bond market, there are reasons to be optimistic for more stability ahead, according to Jennifer Johnston, Franklin Templeton Fixed Income’s Director of Municipal Bond Research. She explains why California’s issues don’t reflect all states, and offers reasons for optimism.

As we reflect on the disappointing performance of municipal bonds in 2022 and even so far in 2023, the fundamentals really have not been a driving force. In fact, in many cases we have actually seen a peak in terms of muni bond credit quality, and many municipalities are actually stronger today than they were prior to COVID-19. Hopefully, state and local governments have prepared themselves for the next rainy day.

Coming into 2023, municipal bond fundamentals were strong as most state and local issuers utilized COVID-19 relief funds to address pandemic costs and economic challenges so they shore up rainy day funds and position themselves for a potential economic slowdown. States in particular entered the year with very strong balance sheets that surpassed levels seen before the pandemic.