Growing federal debt has negative knock-on effects for munis

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By Robert Slavin April 17, 2024

A U.S. credit downturn "would hit localities at higher risk of climate generated damage — from flooding, wildfires, earthquakes — which depend on Federal Emergency Management Agency funding for rebuilding."

Luby said the growing debt pressure on the federal government means low-lying areas are less likely to get FEMA money. "If the economics of post-disaster rebuilding are changed, that could have long term implications for those economies."

John Mousseau, chief executive officer and director of fixed income at Cumberland Advisors, said the current historically low muni to Treasury ratios may partly reflect growing credit skepticism of Treasuries. He noted that credit default swaps on U.S. debt have grown by about 50 basis points in the last year or so. "That is real people putting up real money and so that is people voting saying, 'hey, we see U.S. debt as more risky than we did before.'"

Analysts disagreed on the likely impact of November's federal elections on the federal debt. "I think that the election results for the White House and both chambers of Congress will very much determine whether the recent spending and borrowing trends continue or if there will be some changes," Luby said.

However, Kozlik said, "there are political incentives to avoid the issue at best and to add to the debt if possible" and after November's election it was "very unlikely that change occurs."

At a March Municipal Analysts Group of New York event, Moody's Chief Credit Officer and Head of Global Credit Strategy and Research Atsi Sheth said Moody's has historically found elections make little difference to overall sovereign rating quality but that they can have rapid and significant impacts on sector rating qualities.

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John R. Mousseau, CFA
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