On-ramps in high-yield munis

Since the depths of the pandemic, the federal government has given much-needed help to the many municipalities burdened by the economic shutdown. The CARES Act provided $150 billion in aid to state and local governments, as well as specific funds for health care and transportation entities. The Paycheck Protection Program was a source of forgivable loans for a number of small borrowers. The Federal Reserve created the Municipal Lending Facility as another source of lending for stressed municipal borrowers.

Uneven as it has been, the economic recovery has helped governments and other community entities turn in the right direction, and the market has followed. After the shock in March and April, in which investors pulled money out of the municipal funds to send the S&P Municipal High Yield Index down approximately 11%, from May to August the index rebounded 10%.

While declines in revenue continue to depress sectors such as sales tax bonds, airports and higher education, entry points can be found. After traffic all but vanished in the second quarter, cars and trucks have returned to the streets steadily through the summer, helping toll roads. Smoking trends have been relatively unaffected by the pandemic, making tobacco settlement bonds attractive. And the housing market has been a bright spot in the economy, supporting real-estate based special tax bonds.

While another round of federal help has been slow to appear, it is still a possibility that municipalities will get more help before year-end. Between now and then, these and other sectors may bounce back further. Choosing the right road may offer the extra yield that can make a significant difference in a portfolio’s return in this low interest-rate environment.