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Municipal Bonds
Muni Monitor
Municipal bonds are a foundational element in Nuveen’s proud heritage of investing to support public purpose – and an asset class that touches the everyday lives of all Americans. Munis fund essential facilities and functions such as state and local governments, K-12 schools, colleges and universities, roads and airports, hospitals, water and sewer utilities, housing, and more.
Nuveen’s muni credit analyst team – one of the industry’s largest and longest tenured – constantly assesses the impact of the trends that influence muni credit quality across all market sectors.
Our research identifies what we believe are attractive investment opportunities, and much more. It also yields practical insights into what individuals can expect when it comes to the availability, operation and cost of services used daily – things like the price of an airline ticket or a hospital visit, the health of their regional transportation options, the quality of their local school system, or the dependability of critical utilities.
The Nuveen Muni Monitor presents a broad range of such insights and explores the connections with effective muni investment as well as Americans’ lived experience.
Our second edition focuses on a subject on all of our minds over the holiday season: airports and the ongoing push to rebuild these vital hubs of American infrastructure.
Sector focus: The runway to upgraded airports
- $151 billion: capital needs of U.S. airports from 2023 to 2027.
- $175 billion: estimated value of outstanding airport revenue bonds within a $418 billion transportation sector.
- While rates of air travel over the past several decades have steadily increased, the number of airports in the U.S. has stayed constant. No new commercial airports have been built in the U.S. other than replacements of older airports.
- Increased demand for air travel has led to the need for terminal expansions, with more gates and airport concessions, as well as greater efficiency to accommodate future growth. Airports must devise ways to move greater numbers of passengers through security lines and onto planes without increasing wait times and generating delays.
- The issuance of municipal bonds can help airports finance capital projects to address these constraints. In fact, muni bond issuance for airport projects is up this year. Airports have issued approximately $18.2 billion in revenue bonds through October 2024, which is more than the total amount of airport bonds issued throughout all of 2023.
- The push is on to rebuild America’s airports to meet the demands of a modern era of travel. The Bipartisan Infrastructure Law is providing billions of dollars to support the aviation industry in expanding, optimizing operations and transforming the passenger travel experience. Municipal bonds pick up where federal grants leave off, since the cost to upgrade the nation’s airports well exceeds federal funding.
Overall sector views
Our broad sector views are below. We look forward to commenting on our insights in future editions as our views evolve.
Nuveen Muni Monitor informs our discussions
| Positive | Neutral | Negative |
| Sector | Factors | Assessment | Sector Momentum | Takeaway |
|---|---|---|---|---|
| State and local governments (cities/counties/school districts) |
State and local tax collections: Total tax revenues up 7.2% as of 2Q24 versus 2Q23. | Credit quality expected to remain stable despite revenue and economic slowdown in 2024. Tax collections well ahead of pre-pandemic levels (+28% over 2019) and most states saw FY24 revenues come in aligned with budget. Balance sheets and liquidity remain strong and reserves are projectd to strengthen in FY24 and FY25. | Positive | Budget stability should temper tax increases. |
| State rainy day funds: Median reserve balance is expected to increase to 13.2% of spending in FY24 up from 12.3% in FY23. This is projected to grow to 15.0% of spending in FY25 based on governor recommended budgets. |
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| Unemployment: The U.S. unemployment rate was 4.1% in September 2024. This rate has declined slightly since July 2024. |
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| Rating changes: Rating upgrades continued to top downgrades for the 14th consecutive quarter in 2Q24 by a margin of 2 to 1. | ||||
| Economy: Real GDP and personal income grew 2.5% and 5.3% respectively in 2023. | ||||
| Higher education | Enrollment: Fall 2024 enrollment grew 2.9% YOY though first year student enrollment declined 5.0% YOY. | Higher ed sector historically resilient. Endowments provide a cushion against operating volatility. However, continued enrollment pressure will squeeze tuition dependent institutions that are not competitively positioned. Future student loan forgiveness policies at the federal level may bolster higher ed participation, but botched FAFSA form rollout unhelpful. | Neutral | School closures and consolidation of smaller regional schools expected to become more common. |
| Demographic trends: National decline in high school graduates projected to accelerate beginning in 2026. | ||||
| State funding: Total state support for higher education up 10.2% in FY24. |
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| Endowment returns: Endowment returns average 7.7% for FY23, below S&P, with similar trend expected for FY24. |
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| Federal policy: Loan forgiveness efforts encourage attendance, but FAFSA form challenges frustrate students. |
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| Water and sewer utilities | Liquidity: 580 days cash on hand (DCOH) median higher than pre-pandemic. |
Stability expected given the monopolistic nature and rate setting ability of most systems. Strong liquidity exceeding pre-pandemic levels should lead to outperformance over the next credit cycle. Capital investment required for PFAS mitigation and lead pipe removal will require significant capital investment. | Positive | Upward pressure on utility rates may impact homeowners. |
| Regulatory framework: New EPA drinking water rules may increase treatment costs. Lead pipe replacement mandates are costly. |
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| Housing | Strong demand: Need for more affordable housing in expensive markets supports ongoing construction. |
Housing financing, construction and rehabilitation will continue to benefit from strong political support at both federal and state levels. | Positive | Strong housing demand supports household balance sheets but high interest rates keep homeowners in place. |
| Interest rates: Higher rates slow movement as current homeowners are reluctant to give up low cost mortgages. Delayed fed rate cuts keep housing market sluggish. |
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| Healthcare | Staffing shortages: Demand for nurses led to a spike in labor costs, pushing steep expense growth. Pace of labor inflation began to subside in 2023 and margins have begun to recover in most hospitals. |
Healthcare expenses remain elevated due to current and future staffing shortages. As labor inflation subsides, rate expense growth will begin to normalize. M&A activity will continue as systems attempt to achieve scale efficiencies. | Neutral | Upward healthcare cost trajectory will continue as providers struggle to meet demands of aging population. |
| Stimulus roll off: Federal pandemic aid compensated systems for lost revenues in 2022 and 2023. Federal support is now depleted with no additional funding expected. |
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| Demographic trends: Aging population guarantees demand for services will grow. Sector will struggle to serve older, rural populations. |
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| Transportation (planes, trains & automobiles) |
Airport strained capacity: passenger traffic growth expected to be constrained by flat airline capacity and potential geopolitical and macroeconomic risks. |
Airport cash balances remain robust and domestic air travel has recovered back to pre-pandemic levels. Capital investment needed to expand capacity will drive infrastructure borrowing. | Neutral | Air travelers should expect higher ticket prices and airport construction to be the norm. |
| Airport passenger volume: Leisure travel fully rebounded, but business travel may never return to pre-pandemic levels. | ||||
| Toll road traffic and revenue growth normalizes: traffic growth returns to pre-pandemic levels and slowing inflation limits revenue growth. |
Many toll roads annually adjust rates by the consumer price index (CPI), which led to peak revenue growth in recent high inflation environment. Slowing inflation may limit revenue growth, but sector would benefit from lower operating and capital costs. | Neutral | Drivers are likely to see some relief on toll rate increases, improving affordability. | |
| New tax revenue for mass transit: Ridership not expected to return to prepandmic levels. New financial support coming from state and local governments. |
Well functioning public transit systems are essential for urban areas. Facing a fiscal cliff as federal support wanes, systems are seeing increased support and tax subsidies from local and state sponsors. Systems may see stronger oversight from government partners. | Neutral | Fare increases should be less common, but new dedicated taxes will support transit. |
| Positive | Neutral | Negative |
Related articles
With the Fed signaling the end to rate hikes and possible cuts, investors can focus on municipal bonds behaving like bonds again: offering tax-exempt income and providing portfolio diversification.
Understanding the shifting environment for elementary and secondary education can help municipal bond investors identify opportunities and mitigate risk in the sector.
State ballot initiatives can significantly alter government revenue streams, project funding and fiscal stability. These changes directly affect a municipality’s financial outlook and its ability to service debt, potentially affecting bond ratings and borrowing costs.
Data sources: US Census; NASBO; Fall Fiscal Survey of the States https://www.nasbo.org/reports-data/fiscal-survey-of-states; BLS.gov; national unemployment rate and payroll employment data; Moody's (over 80% of rating changes are in tax-backed sector making this a relevant metric here); BEA.gov; https://www.bea.gov/news/blog/2024-03-29/gross-domestic-product-state-and-personal-income-state-preliminary-2023-0; National Student Clearinghouse Research Center; WICHE – Western Instate Commission for Higher Ed – Knocking on the College Door, 2020; State Higher Education Finance; SHEEO.org; Grapevine Report; https://shef.sheeo.org/grapevine/#about-grapevine; NATIONAL TABLE 1. STATE FISCAL SUPPORT FOR HIGHER EDUCATION, FY 2019-2024; Inside Higher Ed article https://www.insidehighered.com/news/business/financial-health/2023/11/21/universities-see-sluggish-endowment-returns-fy23; Various news articles; Merritt data; US EPA; Transportation Security Administration (www.tsa.gov); Federal Aviation Administration (faa.gov); Federal Transit Administration (transit.dot.gov)
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