Municipal market review:
Strength in the third quarter
October 11, 2019
Backed by rallying Treasury rates, municipal market returns were strong in the third quarter. Listen as Greg Gizzi, head of municipal bonds, reviews the technicals that impacted the municipal market and what to expect for the final quarter of 2019.
The municipal market had strong performance for the third quarter of 2019, with the Bloomberg Barclays Municipal Bond Index returning 1.58%. The index is now up an impressive 6.75% for the year. The Bloomberg Barclays High-Yield Municipal Bond Index finished the quarter with a gain of 2.84% and is now up a handsome 9.69% for the year.
The strong returns from the municipal asset class were on the back of rallying Treasury rates, which benefited from global trade and growth concerns, and monetary easing by the Federal Reserve.
The catalyst for strong municipal returns has been technical. The municipal market has experienced record flows into tax-exempt bond funds, taking in almost $25 billion for the quarter and approximately $68 billion for the year. This is against a backdrop of supply being up roughly 9% year to date. The State and Local Tax (SALT) provision, enacted in 2018, resulted in many investors having their “effective tax rates” rise considerably. This has been a catalyst from investors seeking to minimize any additional tax paid to the government from investment income.
The quarter continued the trend from the second quarter where both credit and curve were the top performing segments of the market. The lower investors went down the credit spectrum and the longer they went out on the maturity curve, the higher the return.
One aspect of the market’s performance thus far in 2019 has deviated from normal expectations. The price component of total return has exceeded the income return. Duration has been the key element in returns this year. This is counter to the normal pattern in which income has been the dominant component of total return.
It appears that the US Treasury market has established a trading range in the third quarter. The final quarter of 2019 may likely return to one in which income will reassert itself as the key driver of municipal returns.
I wish you luck investing in the last quarter of 2019! Thanks for listening.
Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.
The Bloomberg Barclays High-Yield Municipal Bond Index measures the total return performance of the long-term, non-investment-grade tax-exempt bond market.
The Bloomberg Barclays Municipal Bond Index measures the total return performance of the long-term, investment grade tax-exempt bond market.
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.
Ex-US investors may not benefit from potential tax advantages associated with investing in US municipal bonds.
High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to state or local and/or the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.
The views expressed represent the Investment team’s assessment of the market environment as of October 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.
For recipients in the United States, this document is provided by Macquarie Investment Management Business Trust (MIMBT). Institutional investment management is provided by Macquarie Investment Management Advisers (MIMA), a series of MIMBT. MIMBT is a US registered investment advisor, and may not be able to provide investment advisory services to certain clients in certain jurisdictions.