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'The municipal market has never been hit so hard,' it will remain strong in the long-term

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As states warn over budget shortfalls due to the coronavirus, Sylvia Yeh, Co-Head of Municipal Fixed Income at Goldman Sachs Asset Management, tells Yahoo Finance the municipal market will remain strong in the long-term and has recovered in past recessions.

Video Transcript

BRIAN SOZZI: Welcome back to Yahoo Finance live. Now it's not just small businesses that are getting hammered by the coronavirus shut down. Many state and local governments are seeing revenues also dry up. And that could have big implications for an area once considered a rock-solid investment-- municipal bonds.

Let's talk about it with Sylvia Yeh, the Co-Head of Municipal Fixed Income at Goldman Sachs Asset Management. Sylvia, good to talk with you this morning. I thought this was a safe area of the market. Is it still safe?

SYLVIA YEH: Good morning. Thanks for having me. Blanket question, I would say the general answer is yes. I mean, if you look back historically, the municipal market has never been hit so hard or so quickly in so many different ways.

We talk about the lost revenues. We talk about the increased expenses. We see a lot of nasty headlines that are not so helpful, and not always very factual.

But what we need to remember about this asset class is the essentiality of the asset class. The federal government has an obligation to maintain and provide services. So the bailout chatter is not about bailout. It's about fulfilling an obligation.

Services need to happen. So if you look at the services that need to take place in the marketplace, and you see all of the support that's being thrown at our market from the fed or the federal government, that backstopping and that attention, that commitment shows me once we get through this-- and we will, because we've seen things historically similar-- yes, credit quality will remain strong in the long-term. The fundamentals have not changed.

ALEXIS CHRISTOFOROUS: But Sylvia, I'm going to play devil's advocate here. What if we start seeing a wave of state and local governments defaulting? Doesn't that make munis, which have always been this wonderful triple tax haven for folks-- doesn't it make the muni market more dangerous?

SYLVIA YEH: It could. But I think if you look at historical default rates, they were low. They were low coming out of the last Great Recession, right? And this is a grander crisis, wider crisis than that was.

But I think we learned a lot from that. And what we learned were that these municipalities at the state and local levels, to your point, have a diverse revenue base. They're not banking all of their revenue streams from one specific area.

They have three specific pillars of strength, if we back up for one segment-- diverse revenues, federal support, and budgetary discipline. Look at certain states and what they did to come out of the last recession, as an example. Right, I mean, I'll give credit to David Alter, the Head of our Credit Research Team-- debt's not a dirty word, right?

They have ways. They have flexibility. They have ways to be resilient and come out of a crisis like this. Whether it's raising debt or cutting expenses, they actually have the power and the ability to make these changes at the state and/or local levels. And going to default are just scary words, and not necessarily a reality.

And we're seeing things happen right now. These issuers have federal support, which we didn't have in the last Great Recession. And they also have market access. We saw that yesterday with the large deal that priced in the marketplace.

So to say that it's scary and we could default-- a lot of things could happen. But I don't think we've given full credit to what these entities have in their toolkit.

ALEXIS CHRISTOFOROUS: Sylvia, part of that toolkit is the Federal Reserve backstopping these state and local governments. But is that the right thing to do? Or doesn't that just run the risk of keeping bad credit afloat?

SYLVIA YEH: Well, I don't-- I'm not sure I think that they're bad credits. And I'm not sure that all of these municipalities are going to have to tap the MLF. It's great that the Fed is being flexible and has loosened some of the ability for different levels of entities to take advantage.

I'm not sure who's going to use it. There are issuers who are trying to, and testing the market to see if they can get their debt raised and plug their budget holes without going to the Fed. They might not need to. We haven't seen anyone tap that yet.

BRIAN SOZZI: Sylvia, do you anticipate certain states having trouble raising debt via the muni market for critical infrastructure? Look, I'll point to New York, where we continue to be in pretty much a complete lockdown. That's lost tax revenue. Are you seeing investors concerned about, let's say giving New York money?

SYLVIA YEH: Yep. I mean, I live in New York as well. New York is critical to the functioning-- is very important to the functioning of the overall country. New York can come to market. Certain entities within the city of New York have come to market that have been in the headlines, have not received a ton of great press.

And they were able to issue money. People lent them money. They were able to borrow. They were able to borrow a lot. And to our understanding, the subscription level and the desire was there.

So can issuers come to market at really low rates and low credit spreads, which they've enjoyed for years? Probably not. We went from being a great market post-2000, pre-2007, to a credit market post the financial crisis. And then we had a period of being really spoiled.

Perhaps the market's going to develop into a credit market again. These issuers will have access to the market. That's been proven already in just the preliminary stages of this virus. And they will have the flexibility to restructure that debt, just given the inherent clause in a lot of our bonds.

BRIAN SOZZI: All right, let's leave it there. Sylvia Yeh, Co-Head of Municipal Fixed Income at Goldman Sachs Asset Management. Real great insights. Appreciate you taking the time this morning.

SYLVIA YEH: Thank you both very much. Have a good one.