When Moody’s Investors Service warned of a possible downgrade to the United States’ sovereign credit last month, it said hundreds of triple-A muni credits ¯ including five of the 15 states it rates Aaa ¯ could likely follow.
Moody’s affirmed the sovereign credit and assigned it a negative outlook on Aug. 2, and then assigned negative outlooks on the five U.S. states and 303 other public finance issuers it sees as “indirectly linked” to the federal government.
Standard & Poor’s walked a different path, deciding to downgrade the United States. But to the relief of many observers, it says it sees no reason for an automatic downgrade of its AAA muni credits as a result.
After stripping the sovereign credit of its gilt-edged rating last Friday, the agency has since defended the notion of munis carrying better-than-sovereign ratings. It called public finance credits “among the most stable and predictable in the world” and said the decentralized structure of the governmental system allows for state and local government credits to be analyzed independently.
Standard & Poor’s grants the coveted AAA rating to 13 states, or 26% of all state ratings, according to a July 15 credit report. And no state ratings have been changed yet.
“Compared with many of their peers on a global basis, U.S. state and local governments function with a high level of revenue independence,” the agency said late Monday, noting most state revenues do not stem from the federal government, and local government revenues are even less linked.
Stressing the independence of state and local governments makes sense, according to Dick Larkin, director of credit analysis at Herbert J. Sims, because the federal government is unique in having been created by the states, rather than the other way around.
“States still retain all powers that are not specifically granted to the U.S. federal government,” Larkin wrote to clients Tuesday. “You have 'sovereign states’ ¯ the 50 U.S. states ¯ within a global 'sovereign state,’ the U.S. government. … That’s why they are making an exception to their sovereign ceiling rule in the U.S.”
One thing Standard & Poor’s pointed to as they downgraded the sovereign credit was a lack of real cuts to the federal budget.
Rob Williams, director of fixed income at Charles Schwab, points out that’s a credit positive for state and local issuers, insofar as it doesn’t restrict the trickle down of cash flow. “The credit quality for the broad array of municipal credits hasn’t changed dramatically,” Williams said. “And most of those states and municipalities have been anticipating a reduction in federal funding. So we don’t see a major change in credit quality... Unlike Moody’s, S&P has been a little bit less aggressive in saying they might take immediate action on ratings of AAA state and local government issuers.”
Williams concluded that any widening of spreads versus Treasuries could very well be a buying opportunity.
That seems to be the response retail investors had Tuesday.
While muni yields were steady across the curve Tuesday, retail appetite for tax-exempt paper strengthened, according to data compiled by BondDesk.
BondDesk pegs itself as “the voice of retail” ¯ data collected from its electronic trading platform reflects aggregate moves from retail investors and their financial advisors across the country.
Data from this week indicates retail investors were frightened to the sidelines Monday, but with Standard & Poor’s defending the muni market late that evening, coupled with the equity market picking itself up Tuesday morning, retail investors jumped back into the game.
BondDesk data showed retail investors buying munis midday Tuesday at a buy-to-sell ratio of 3 to 1, the inverse of Monday.
“Retail is fickle,” BondDesk’s Senior Market Strategist Chris Shayne said.