April 2019 Muni Market Monthly Report –“Are Munis Worth Their Weight in SALT?”
Munis continue their fast start to 2019, as fundamentals and technicals are in a good spot, proving munis are a great late-cycle performer. They are now considered rich to taxables versus recent ratios, but with an estimated negative net supply of $17.2 billion, we do not anticipate this changing anytime soon and munis historically have room to get richer. This summer may be a good time to sell bonds if you need the liquidity. Otherwise, “let the good times roll”.
In this month’s credit review, we look at the impact that the 2017 tax reform’s cap of $10,000 on State and Local Tax(SALT) deduction on Federal returns is currently having on the market and how we think it will affect credit rating trends in the future. The salt trade helped write the history of colonization and world empire dominance. Will SALT, over time, do the same in muniland?
Muni Market Review
The muni market continues its strong start to 2019 and is proving itself to be a good late-cycle performer. The Barclay’s benchmark index has a total return of 3.2% year-to-date, and we do not see anything in the next 30 to 60 days that will slow it down. Highlights of this YTD performance are as follows:
- Muni yields are down 21 to 47 bps, with the curve flattening along the way.
- Taxable yields are down 25 to 16 bps, steepening along the way.
- Inflows into muni mutual funds were over $4 billion in April and have been positive for 16 straight weeks now.
- Year-to-date, muni issuance has picked up and is now higher than YTD 2018, but it remains low versus recent history:
- 2019 is up 4.1% versus 2018.
- 2019 is down 25.3% versus the last 5 years’ average.
Other than an awkward 2 am tweet, or a major US Treasury sell off, munis are technically primed to remain strong over the next 30 to 60 days with net supply estimated to be at negative $17.2 billion. If you need to raise cash, we recommend using the summer months to sell munis. Please contact us if you need the liquidity.