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.