August 2019 Muni Market Monthly Review –“Lower Yields, Lower Coupons, Lower Future Prices?”
A strong Treasury rally pulled munis to their lowest yield levels since I have recorded the data (6/31/1991). What is next? We have been bullish on munis all year long, and feel the foundation is solid for the asset class, but we must wonder if the market has come too far, too fast. Technicals will go negative over the next 30 to 90 days and we are expecting some market weakness and the opportunity to make some investments.
Municipal yields are now at record lows throughout the curve, causing many new deals to be priced with lower coupons to minimize the premiums investors have to pay. This is causing investors to coupon down from the long-time market standard of 5%. MainLine also feels it is ok to be couponing down, but not too much or too far down. There is a “creature” hiding in the closet, and its name is “Market Discount (Outside De Minimis) Bonds”. This month’s credit review explains what this creature is and how to cage it bonds.
Muni Market Review
- A strong Treasury rally tried hard to pull munis along for the ride. Overseas market weakness, trade wars and Fed Fund rate cuts assumed by the markets led to big price gains in August. Munis underperformed, but did a better than average job of keeping up. August highlights include:
- Muni yields were down 18 to 40 bps, with the curve flattening.
- The muni market has seen 33 straight weeks of inflows showing demand for tax-exempt income remains strong. This is after 2018, which was virtually flat, and outflows in 2017 and 2016. Now that yield levels are at all-time lows, we will see if this demand continues.
- Taxable yields were down 50 to 62 bps with the curve slightly flattening. The 30 year reached an all-time low in August and the 10 years got within 10 bps.
- Year-to-date, muni issuance is still picking up and it looks like this will continue:
- 2019 is up 3.9% versus 2018.
- 2019 is down 17.4% versus the last 5 years’ average.
Munis are about to enter a technically weak time of year, this combined with increased supply from lower rates, anticipated slowdown in inflows, could provide an investment opportunity. We will continue to monitor, and keep our investors informed. MainLine West Tax Advantaged Fund VI remains on hold until we do get some good weakness in the muni market. Three of the five Funds have been executed in the months of December and January. SO maybe we are not far off.
Read the full Monthly Review here.