Podcast: Muni Moments: Slow Down ... Federal Cuts Are Coming

Nick Venditti: Hi, I'm Nick Venditti, head of the Municipal Fixed Income team here at Allspring Global Investments. Welcome to this edition of SpringTalk. Today, I want to talk to you a little bit about all the noise coming from Washington: the conversation around federal cuts to a variety of different programs and, in particular, how those cuts may impact the municipal bond market. Listen, we've talked in the past about how federal cuts might have a negative impact on the higher education sector, but if those cuts go through and they are more aggressive than people are predicting, it's possible they impact the muni market in a variety of ways. There's kind of a good news/bad news scenario that's likely to play out—the bad news is that federal budget cuts can be impactful to municipalities. Look, we lived in a world where munis benefited greatly from the stimulus money provided during the COVID pandemic. That money allowed municipalities to bolster balance sheets, bolster income statements, and put them on a financial footing that was—frankly—superior to where they had been pre-COVID. But that money is gone now, and if less of it is to come, that's almost certainly going to cause a bit of credit disruption. Similarly, there are sectors like health care. Health care, particularly those hospitals that rely heavily on Medicare and Medicaid payers to generate revenue, could see a little bit of trouble if anything is done to change the mechanism behind Medicaid financing. The good news for municipal investors is that muni credit in general still remains strong. The better news is that municipalities have a lot of levers available to them to generate revenue. Sure, they are reliant on subsidies from the federal government, but they can also raise property taxes, raise sales taxes, and charge you parking revenues. There are a myriad of ways that municipalities can dip into each and every one of our pockets to balance their budgets on an annual basis. That credit strength, that fundamental credit strength, is why munis have held up even during kind of the worst financial times. So, look, my advice to you as you navigate these volatile markets is slow down. Slow down when you're thinking about which munis to put in your portfolio, make sure that you're doing the bottom-up fundamental credit research that's necessary, and slow down in life because traffic tickets are another way that municipalities can generate revenue—and you're likely to see more speed traps over the coming years. Thank you so much for joining us on this edition of SpringTalk. Have an excellent rest of your day!