Municipal Market Update: November

Municipal Market Update: November

Western Asset examines recent trends in the muni bond market and provides its outlook about conditions ahead.


Performance

  • The Bloomberg Barclays Municipal Bond Index posted a total return of +1.11% during the month, outpacing the 0.6% return in the Bloomberg Barclays U.S. Aggregate Bond Index (the benchmark for the taxable market).
  • For the year-to-date period, the muni index returned +0.08%, outperforming its taxable counterpart, which returned -1.79%.
  • High yield municipal bonds trailed investment-grade bonds during November as the Bloomberg Barclays High Yield Municipal Index posted a return of +0.70%, but outperformed the investment-grade index for the year-to-date period with return of +3.86%.

 

Revenue bonds underperformed G.O. bonds in three of the four periods shown below

Revenue bonds outperformed G.O. bonds for the YTD and 12 month periods

Source: Bloomberg Barclays, as of 11/30/18. 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.

 

Technicals

  • Demand, as measured by long-term flows into mutual funds and ETFs, was modestly negative in November, but remained positive for the year-to-date period.
  • New Issue supply totaled $26.8 billion for the month, down about 26% when compared to the amount of issuance hitting the market during October.
  • Year-to-date, new issuance was approximately $315 billion, representing a 16.9% decline versus last year’s pace.

 

Muni issuance: 2018 vs. 2017

Muni issuance: 2017 YTD vs. 2016 YTD

Source: Bloomberg Barclays, as of 11/30/18.

 

Monthly net new cash flows into long-term muni funds and ETFs

 

Monthly net new cash flows into long-term muni funds and ETFs

Source: Source: Investment Company Institute, Washington DC, as of 12/05/18. November flows are estimated as of the week ending 11/28/18. 

 

Valuation

  • Yields declined across all maturities in November and the AAA municipal yield curve flattened as intermediate- and longer-term maturities declined more than short-term maturities.
  • The 10-year AAA muni to US Treasury ratio was 85.3% at the end of November, and on the long end was 99.5%. 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

 

Yield Curve Comparison: BBB Muni Revenue, AAA Muni & US Treasury

Source: Bloomberg Barclays, as of 11/30/18. 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 

 

 Muni YieldUST yieldsMuni/Treasury RatioTaxable Equivalent Yield
AAA    
1 year1.87%2.68%69.91%2.97%
3 year2.03%2.80%72.51%3.22%
5 year2.16%2.81%76.84%3.43%
10 year2.55%2.99%85.28%4.04%
30 year3.27%3.29%99.48%5.20%
BBB Revenue    
1 year2.49%2.68%92.85%3.95%
3 year2.65%2.80%94.74%4.21%
5 year2.82%2.81%100.40%4.48%
10 year3.36%2.99%112.30%5.33%
30 year4.23%3.29%128.72%6.72%

Source: Bloomberg Barclays, as of 11/30/18. 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.

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IMPORTANT INFORMATION: All investments involve risk, including loss of principal. 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.

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Outperformance does not imply positive results.

A credit rating is a measure of an issuer’s ability to repay interest and principal in a timely manner. The credit ratings provided by Standard and Poor’s, Moody’s Investors Service and/or Fitch Ratings, Ltd. typically range from AAA (highest) to D (lowest). Please see www.standardandpoors.com, www.moodys.com, or www.fitchratings.com for details.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.