Conning, which oversees $9 billion in municipal debt for insurance companies, says it’s boosting its allocation to the local bonds as U.S. states’ economic health stabilizes four years after the recession.
“With incremental dollars, we’ve been putting them toward municipals since early this year, more than other asset classes,” said Paul Mansour, head of Conning’s municipal-credit research group, in a telephone interview. States are “at a more sustainable point” with increased tax collections and bolstered reserves, he said.
Hartford, Conn.-based Conning is adding munis instead of other fixed-income securities such as corporate bonds even as concerns over rising interest rates and Detroit’s record bankruptcy in July have led investors to pull $47.5 billion from local-debt mutual funds this year, according to Lipper US Fund Flows data.
Most of the fear over issuers’ credit quality is unfounded, Mansour said. States have increased revenue for 15 straight quarters, Census Bureau data show. They’ve trimmed payrolls to close to the lowest level since 2004 and slowed borrowing for projects, according to the Labor Department and Moody’s Investors Service.
As a result, the total return on state obligations, including interest and price change, is poised to beat the $3.7 trillion muni market for the first time since 2010, Bank of America Merrill Lynch data show.
Washington had the biggest jump in Conning’s semiannual rankings of state fiscal health, rising 13 levels since April to 14th. North Dakota and South Dakota ranked first and second, respectively, unchanged from the last reading.
Weakest States
Not all states are recovering at the same pace, Conning said. Connecticut, Illinois and Kentucky have the weakest fiscal health, mostly unchanged from April. Illinois has the worst-funded state pension, followed by Kentucky and Connecticut, according to the report.
Puerto Rico, the U.S. commonwealth with near-junk credit grades and $70 billion of debt, would be rated even lower than those states, the report said.
–Editors: William Glasgall, Stephen Merelman