April 2018 Muni Market Monthly Report – Goodbye Libor, Hello SOFR”
Munis spent the month of April showing how they outperform taxables in a rising rate environment. Muni rates increased, but at roughly 2/3 of their equivalent taxable rates. This is the usual long-term performance of munis in a rising rate environment. If we can get a pick-up in issuance over the next 30 days, we think there could be some good buying opportunities before the technically strong summer months.
A mainstay of the investment world is schedule to be terminated by the end of 2021. The $350 trillion Libor index base market will need to find a new guideline. There is no need to get overly concerned. Even the least desirable option is better than one than the current one, which has been manipulated and is not based on market transactions. The initial replacement looks to be SOFR, a secured overnight rate used for Treasury Repo transactions. We will review the Libor market, SOFR, and the impact on the muni market in this month’s credit review.
Muni Market Review
The Treasury market experienced a good sell-off in April. Munis did the same, but proved they will outperform in a rising rate environment. Highlights from April are as follows:
- Muni yields increased from 7 to 15 bps, curve unchanged.
- Taxable yields increased from up 20 to 7 bps with the long-end flattening.
- Munis remain a good value on the short-end and cheap on the long-end, as compared with taxable rates.
- Issuance is down 23% versus year-to-date 2017, but new money issuance is up 11%. The drop in refunding is over 56%, causing the year-to-date decline.
The market technicals remain negative for the next 15 to 30 days. Any increase in issuance could provide investment opportunities. Otherwise, it could be the fall before things loosen back up again . If you have any cash you want to get to work, now is the time. We can build a short-term portfolio that will earn 2% to 2.25%, intermediate-term portfolio that will earn 3% to 3.25%, long-term from 3.75% to 4.00%.