Muni Research

Yields rose across all fixed income assets due to expectations of swift Federal Reserve (Fed) rate hikes to curb run-away inflation, and munis were no exception. The “rich” valuations that we pointed out last quarter have turned firmly into our “cheap” range as a result of the selloff.

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Record fund inflows led to unprecedented demand for Munis last year, keeping volatility at a minimum compared to the wild swings in the Treasury market. As inflows are expected to continue and supply remains light to start the year, we expect modest outperformance in the near term.

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Municipal bonds generally lagged Treasuries in June given already tight spreads. This month we look at evolving yield opportunities and how municipal bond markets could play out through the summer. Munis were virtually unchanged for the month of June, underperforming U.S. Treasuries. Flows into Muni Mutual Funds continued but seem to be slowing as we believe the market remains overvalued. As the summer season begins and issuance slows, Munis may resume outperformance due to a supply/demand imbalance and a thin market.

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Municipals continued to outperform in April, with yields falling by up to 16 basis points (bps) compared to U.S. Treasury yields decreasing by up to 9 bps. Key Points: Despite elevated Tax-Exempt Muni issuance, Munis continue to rally and outperform their U.S. Treasury and Corporate bond counterparts. The Muni Market continues to experience record-setting fund inflows that are fueling unrelenting demand, outstripping this elevated supply. Anticipating higher future income tax rates, investors continue to flock to Munis, even though other fixed income investments offer a better value proposition.

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Municipals continued to outperform in April, with yields falling by up to 16 basis points (bps) compared to U.S. Treasury yields decreasing by up to 9 bps. Key Points: • Muni Mutual Funds again added to record inflows for the month• Demand has been fueled by rating agencies revising sector outlooks to the upside, Federal Stimulus funds making their way to issuers, and plans for tax hikes.

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Munis returned to outperforming in March, with yields falling by up to 5 basis points (bps) across the curve compared to U.S. Treasury yields rising by up to 30 bps. Inflows into Muni Mutual Funds are on their fastest pace on record to start a year. This unprecedented demand has caused Munis to maintain their rich valuations vs. other fixed income asset classes. In addition, the American Rescue Plan Act’s aid to Muni issuers is easing credit concerns, drawing back investors who may have been wary of the market.

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After remaining relatively flat for the first six weeks of the year, Muni yields took a sharp turn higher in mid-February, finally beginning to catch up to the rise in U.S. Treasury yields. Improving economic growth numbers combined with the proposed $1.9 trillion Federal Stimulus Bill have resulted in continued expectations of increasing inflation leading to higher yields. Inflows into Muni Mutual Funds continued for the month but at a much slower pace and we expect lower inflows or even an outflow cycle over the coming weeks, resulting in reduced demand. Our defensive approach has held up through this selloff…

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Muni yields were virtually unchanged in January, continuing their outperformance of U.S. Treasuries, which sold off by up to 20 basis points (bps) on the long end of the curve, as Muni-to-Treasury ratios fell to all-time lows. Low supply combined with continued inflows into muni mutual funds have caused a renewed imbalance in the market. As a result, credit spreads have continued to narrow, leading to an underpricing of credit risk. We continue to focus on high grade credits as underlying economic risks still exist and rates remain at historic lows, leading to limited upside potential.

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Munis were virtually unchanged in December, outperforming U.S. Treasuries, which sold off by 7-10 basis points (bps) across the curve. Market activity was subdued as issuance slowed in December but full-year issuance broke the record for highest ever. Credit spreads continued their dramatic narrowing as more government support is expected, especially with the likelihood of a Democratic Senate. So-called “problem” credits, such as the New York City MTA (which we’ve added to our spread tracking list on page 3), have seen the most significant narrowing. We continue to focus on high grade credits as underlying economic risks still exist and…

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After rising in October, Muni yields fell dramatically in November, outperforming yields on U.S. Treasuries. Munis rallied with Treasuries after the election results were announced but did not track the selloff in Treasuries after successful COVID vaccine trials were revealed. Issuance slowed in November to only about $20 billion, causing a renewed supply and demand imbalance, a dramatic shift after October’s issuance broke monthly records and pushed total 2020 issuance to a yearly record. Even with yields resetting lower, Muni mutual funds continued their streak of inflows, taking in another $6 billion in cash. Credit spreads continued to fall as…

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In October, Muni yields crept higher, rising by 6-9 bps across the curve, echoing the move higher in US Treasury yields. Muni Mutual funds recovered from a single week of outflows and took in over $5 billion for the month. After the election results were announced, how-ever, both Muni and U.S. Treasury yields fell dramatically as expected gridlock in the split legislature diminished the prospects of a massive stimulus package and higher inflation. The main story in Munis was record monthly supply in October as issuers rushed to market prior to the election.

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The Municipal curve steepened in September, with yields on the short end essentially flat and 10+ year yields higher by 5-6 basis points (bps). Inflows into Muni Mutual Funds continued, with an additional $6 billion added this month. With rates so low, the market appears to be reaching for yield and focusing on lower-rated credits, resulting in spreads continuing to fall. We expect new issuance to pick up prior to the election and the market’s focus to remain on these lower-rated issuers, presenting a good opportunity to invest in the higher-grade sectors and credits that we prefer.

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Municipal yields drifted higher in August after falling in July, with the curve steepening in concert with U.S. Treasuries. Muni Mutual Fund inflows have continued for 15 consecutive weeks, taking in another $11 billion in August. The curve remains steep, especially in the six- to 10-year area, where we’re finding opportunities to pick up additional yield while not adding significant additional duration risk. Credit spreads remain elevated but have narrowed from their peak, signifying a “reach” for yield.

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While Treasury and Corporate yields fell in June, Municipal yields were generally flat and actually unchanged for the last two weeks of the month, as the summer slowdown kicked in. This underperformance has brought Munis back to an attractive level vs. comparable Corporates, though not as compelling as back in March. After unprecedented outflows during the market dislocation, Muni Mutual Funds have reported seven consecutive weeks of inflows totaling over $15 billion. These inflows combined with seasonally elevated coupon and maturity payments should lead to strong demand through the summer.

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Municipals rallied significantly in May, with AAA yields moving lower or remaining unchanged in every trading day of the month. The opportunity to invest in munis that we pointed out in last month’s report was also recognized by the broader market, causing munis to return to more “fair value” levels compared to other fixed income assets. As over $3 billion in cash returned to muni funds, short-term yields fell to historic lows and the overall market posted one of its best monthly performance numbers in over 10 years. We expect muni yields to remain at these depressed levels in the…

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