How Harvey could impact the US muni bond market


Craig Brandon, Co-Director of Municipal Investments at Eaton Vance, a leading global asset manager, notes that “the US muni market has held up well so far amid devastating floods in the Houston area, although it’s still too early to assess the full damage resulting from the storm.”

He notes: The US municipal bond market has been relatively quiet amid tragic flooding in Houston, the nation’s fourth-largest city. Yet, it is still too early for a full evaluation as Hurricane Harvey continues to impact the Texas and Louisiana coasts.

Overall, the municipal bond market has remained stable during the past week with little overall volatility as a result of the storm. Both the tax-exempt and taxable municipal markets have been trading along with Treasury yields. It’s important to remember that most of the credits financed in the municipal market are essential assets such as hospitals, power systems and water systems. They typically receive high priority from federal and state government officials once a storm subsides. That said, we are closely watching the U.S.-based property and casualty insurers, which own approximately 9% of the overall municipal market.

The most relevant precedents we can look to in recent history are Hurricanes Sandy (2012), Ike (2008), and Katrina (2005). Most notably, the city of New Orleans, in the wake of Katrina and the prolonged rebuilding efforts and permanent population declines, continued to make all scheduled debt service payments on time.

Texas in particular is well-positioned to assist in the recovery efforts given the state’s substantial $9.7 billion rainy-day fund balance. Governor Greg Abbott and Houston Mayor Sylvester Turner have both reiterated their willingness to use available reserves to assist in the rebuilding effort. It is likely these funds would be replenished through Federal Disaster Aid.

Blog Image Texas Aug 31

Still, we may not know the full extent of the damage inflicted by this historic storm for days or even weeks. We continue to monitor the affected areas and issuers on a case by case basis for any potential impacts.

Fitch Ratings recently said that similar to Hurricanes Katrina, Sandy and Ike, the local governments affected by Harvey are likely to use a mix of federal relief funds, state support and insurance claims to pay for most damage related to the storm. It expects most damaged property in the affected areas to be rebuilt, which will maintain tax bases, rather than residents and businesses leaving the communities. Fitch also noted that Harvey isn’t likely to trigger ratings downgrades of individual property and casualty insurers or reinsurers.

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