Municipal market review: A strong start
April 11, 2019
Despite general market uncertainty during the first quarter, the municipal market posted positive returns. Listen as Greg Gizzi, head of municipal bonds, reviews market drivers, performance, and the current backdrop for what’s expected as we head further into 2019.
The municipal market posted an impressive return of nearly 3% for the first quarter of 2019 on the back of record flows into tax-exempt bond funds. Lipper reported inflows of $22.5 billion for the quarter, a record since the data series began recording in 1992. This was in stark contrast to the approximate $13 billion in outflows the municipal market experienced during the fourth quarter of 2018.
The main catalyst for financial markets was the Federal Reserve announcing that there would be no further rate hikes in 2019, and that the prospects for future hikes, or cuts, would be contingent on economic data. The Fed currently forecasts only one rate hike in 2020. This propelled both the equity and bond markets higher, amidst the lowering of global growth estimates during the first quarter and improving prospects for a trade deal with China.
Municipal supply for the quarter was up approximately 15% for the quarter, according to The Bond Buyer, but this was against the first quarter of 2018 which was down substantially due to tax reform concerns pulling supply forward from the first quarter of 2018 into the fourth quarter of 2017. With record flows into tax exempt bond funds, the market performed extremely well on strong technicals.
From a performance perspective, the long end of the curve outperformed the front end, and lower quality outperformed higher quality, a scenario that favored both long and high yield strategies. We entered 2019 expecting the market to see relatively muted trading ranges for rates, and therefore, believed income would be the driver of return. With MMD AAA GO rates rallying 42 basis points in both the 10- and 30-year spots, this certainly remains the case.
We expect the market to experience volatility in 2019. Barring any significant change to the economic backdrop, we would be opportunistic buyers of municipal debt. With tax payors realizing what the Tax Cuts and Jobs Act (TCJA) means for their personal finances for the first time, we believe municipal bonds will be an increasingly popular vehicle of choice for investors to help minimize the impact of taxes, particularly in states where the State and Local Tax (SALT) provision has had the largest impact on household balance sheets.
Thanks for listening and good luck investing in 2019.
Sources: Bloomberg, Bloomberg Barclays Indices, The Federal Reserve, and Lipper
IMPORTANT RISK CONSIDERATIONS
The views expressed represent the Manager's assessment of the market environment as of April 2019, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.
Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.
Fixed income investments may also be subject to prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.
High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.
Funds that invest primarily in one state may be more susceptible to the economic, regulatory, and other factors of that state than funds that invest more broadly.
Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to state or local taxes and/or the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
All third-party marks cited are the property of their respective owners.
The Thomson Reuters Municipal Market Data (MMD) AAA Curve is a proprietary yield curve that provides the yield curve of the highest-rate AAA state general obligation bonds, as published by Thomson Reuters.