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They’d be better off with direct stimulus, ‘but Municipalities have managed through crises before, they’ll do it again’: Goodfield

As stimulus optimism wanes, many investors are unsure how the U.S. economy and municipal bonds will be impacted. Ashton Goodfield, DWS Group Head of Municipal Bonds joins The Final Round panel to discuss what investors should expect from the municipal market.

Video Transcript

JEN ROGERS: I want to talk about municipal bonds now, though. We're going to move away from equities. And this is important now, because, as you probably know, coronavirus has ravaged state and city budgets. And this is actually a really big market.

I want to bring in Ashton Goodfield, DWS Group head of municipal bonds to dive into this. So Ashton, I mean, you-- I'm in New York City right now. And we all know what the budget is looking like here, what the costs are for the city, for the state. What does it do to the muni market, having-- knowing what the difficulties are going to be in terms of tax revenues here, how much more things have cost. Is it in dire shape?

ASHTON GOODFIELD: Yeah, you're right. Costs have gone up because of the pandemic. And revenues had declined. And that makes it much harder for these municipalities. But also remember that the municipal market credits are quite strong. And they went into this crisis from a position of strength. Their financials were in good shape.

So most municipals are quite strong. The default rate in investment-grade municipals is very low. But there are challenges, because the tax revenues have gone down and revenues from the New York MTA are down, as there are fewer riders. And yet the costs from PPE and cleaning have gone up.

So the budgets are stretched. A lot of these municipalities are putting a plug into their budgets, depending on fiscal stimulus. So they are looking for a package from the federal government. And rating agencies have put a lot of the credits on negative outlook or negative watch because of these pressures,

But, again, I'll go back to the credits municipal market are strong. The default rate over time is 0.1%, much lower than the 2.3% of IG credit. So I would caution, though, that there are credits in the high-yield portion of the municipal market that are under pressure. And in that part of the market, the default rate has been climbing this year already. And we expect that to continue.

RICK NEWMAN: Hey, Ashton, Rick Newman here. So the gap between what the Democrats want to provide for states and cities and Republicans want to provide is about $850 billion. Democrats want $1 trillion and Republicans want only about $150 billion. If it were to come in at one extreme or the other, would that change the picture for municipal bonds and for municipalities?

ASHTON GOODFIELD: Well, we definitely need something. And right now, it looks like there may be no stimulus package. So that would be a problem, certainly. But municipalities have managed through crises before. They'll do it again. But they really would be better off with a stimulus package directed towards state and local governments.

Moody's has said that without $500 billion in stimulus, there would be an additional 4 million unemployed. So I think that the legislators in Washington, the administration must understand that absent stimulus, we're going to see a lot more layoffs. We're going to see a further slowdown in the economy. So it really does benefit the overall economy to see help given to these state and local governments.

JEN ROGERS: So then how do you think about the election? What would a Biden administration, do you think, mean for the municipal market?

ASHTON GOODFIELD: I think we'll see finally an infrastructure package. Infrastructure legislation has really been supported by both sides of the aisle, because both Republicans and Democrats realize that helping infrastructure, helping roads, not only the maintenance of our current infrastructure, but building new infrastructure to help us get further into the 21st century, like broadband, is so important for the economy. The American Society of Civil Engineers gave the US infrastructure a grade of D+ three years ago, way before the pandemic.

And clearly, things have gotten worse, because given the financial pressures that we talked about a minute ago, state and local municipalities are spending less on capital projects. Airports are stopping plans for capital projects for the time being, because their revenues are down and costs are up. So we do see more need than ever for infrastructure.

So I think that there is a lot better chance that we'll see an infrastructure package passed, especially if we have a Democratic sweep. The platform of the Democrats have connected climate change mitigation and infrastructure building to the improvement of the economy. And I think that's appropriate.

One thing that it's hard to say is how that might be facilitated or implemented. We don't know if it's going to mean more tax exempt issuance. Is it going to mean more build-America-type bonds, so a taxable issuance? So we can't tell it the details might be right now, but I do think it's supportive of municipal credit.

And then another factor is there might be an increase in corporate tax rate, which would likely bring in more demand for municipals across the curve, and maybe more in the long end as well. So that could help demand, if we see the corporate tax rate increase from where we are today.

JEN ROGERS: Ashton Goodfield-- well, it's infrastructure week every week somewhere, I feel like. So maybe it'll eventually get through. Ashton Goodfield, DWS Group head of municipal bonds, great to get a chance to talk with you.