Credit market risk rises as virus relief standoff continues: Morgan Stanley Wealth

The legislative impasse over more coronavirus relief funds for state and local municipal governments is boosting risk in U.S. credit markets, according to a Morgan Stanley Wealth Management note by strategists Scott Helfstein and Monica Guerra.

Budgets at state and local governments have been severely squeezed by the coronavirus pandemic as tax revenue drops while expenses are climbing, they wrote.

Even with the strained municipal budgets, muni bond yields have touched historic lows as a result of “constructive seasonals and risk-off sentiment,” they said. But that may not last.

“Failure to secure aid for state and local governments presents downside risks for bonds of low credit quality at a time when investors are willing to move down the credit curve,” Helfstein and Guerra wrote.

Student loans are another market facing higher risk, as supplemental unemployment insurance benefits expired at the end of July.

Although the deferral of some federal student loan payments was extended to the end of the year, “those with private loans get no reprieve,” they wrote.

“Thus, we believe that securities backed by private student loans with speculative grade credit quality and tranches with few enhancements may experience pressure.”

High-yield muni bond ETFs: NMZ, HYD, MAV, MHI, HYMB, CXE, CMU, SHYD, MHF

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