Western Asset examines recent trends in the muni bond market and provides its outlook about conditions ahead.
- With low yield volatility, and a strong fundamental backdrop, municipal bond prices were generally lower, but income returns pushed totals returns toward a modest positive position by month-end.
- The Bloomberg Barclays Municipal Bond Index posted a positive total return of +0.24% in July, outperforming the Bloomberg Barclays U.S. Aggregate Bond Index (the benchmark for the taxable market), which returned +0.02%.
- For the year-to-date period, the muni index was basically flat; down -0.01%, but again better than its taxable counterpart, which was down -1.59%.
- Short and intermediate bonds generally outperformed longer bonds in July and lower credit quality issues generally beat higher-rated securities.
- High yield municipal bonds outperformed investment grade bonds as the Bloomberg Barclays High Yield Municipal Index posted a return of +0.35% in July and was up +4.03% for the year.
Revenue bonds outperformed G.O. bonds for the 12-month period, but lagged slightly in the other periods shown
Source: Bloomberg Barclays, as of 7/31/18. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. For illustrative purposes only and does not represent the performance of any specific investment product.
- Demand, as measured by flows into open end municipal bond mutual funds remains steady.
- Muni new issuance in July totaled $27 billion, down modestly from June’s $33 billion figure.
- Year-to-date, gross issuance was a little north $190 billion, down about 15% compared with the first seven months of 2017.
- We believe the dynamics between supply and demand for munis will remain favorable in the short term as bond redemptions are anticipated to remain high in August, and supply is likely to remain restrained.
Muni issuance: 2018 vs. 2017
Source: Bloomberg Barclays, as of 7/31/18.
Monthly net new cash flows into long-term muni funds and ETFs
Source: Source: Investment Company Institute, Washington DC, as of 8/08/18. July flows are estimated as of the week ending 7/25/18.
- Short and intermediate muni bonds outperformed the long end in July with yield ratios of muni bonds inside of 10 years richening more relative to U.S. Treasuries than longer-dated issues.
- The 10-year AAA muni to US Treasury ratio is 84%, and on the long end is 99%. These ratios are calculated by dividing the respective muni yield by the respective US Treasury yield.
Yield Curve Comparison: BBB Muni Revenue, AAA Muni & US Treasury
Source: Bloomberg Barclays, as of 7/31/18. Past performance is no guarantee of future results. For illustrative purposes only and does not represent the performance of any specific investment product.
Muni/Treasury Ratios and Taxable Equivalent Yields
Source: Bloomberg Barclays, as of 7/31/18. Past performance is no guarantee of future results. For illustrative purposes only and does not represent the performance of any specific investment product. Taxable Equivalent Yield (TEY) is based on 37% top tax bracket. An investor may be subject to the federal Alternative Minimum Tax, and state and local taxes may apply. Capital gains, if any, are fully taxable.
- Our short-term outlook is unchanged; we believe valuations will be driven in the short term mostly by the balance between supply and demand, as we anticipate fundamentals to remain solid.