In February, the muni market quietly moved forward into a technically weak time of year. We feel the market, due to increasing issuance, market fear, and relative value, is shaping up nicely for those with cash or prerefunded bonds.
Welcome, muni investors you belong to the greatest financing market for localities in the world. The US municipal market is a lean mean financing machine compared to other countries, and their flawed attempts to do the same. This month, we take a tour of the world and take a quick snapshot on financing needs in countries like the United Kingdom, Africa, Sweden, and China. These are not the only countries using “municipal debt”, but their stories do represent the problems that exist in other countries, while demonstrating the success of the USA.
Muni Market Review:
Market performance in February was not so bad, given the lack of a January effect in the prior month. This being said, we are now moving into a seasonal period, where issuance is starting to pick-up and less rollover funds are available to invest. This should lead the market to weaker pricing and higher yields. Highlights from a quiet February are as follows:
- Muni rates changed from -13 to -3 bps, with the curve steeping even more. Since the beginning of the year, the muni curve has steepened 27 bps.
- Taxable rates changed +0 to +6 bps, slightly underperforming munis and flattening. Since the beginning of the year, the US Treasury curve has flattened 11 bps.
- The flight to the short-end of the muni curve tells us that muni investors are getting defensive.
- Munis represent good long-term value, with long-term par yields approaching 4%. We believe this will continue to be the case, and maybe even better over the next 30 days.
Other February Muni Market moments:
- Issuance is off to another near record pace and is about to get even bigger. To date, 2017 issuance volume is right on 2016’s record levels. Refunding volume is down a bit, due to the rise in interest rates, but new money deals are up 8.8%.
- Muni credit default spreads are virtually unchanged year-to-date, other than Illinois, which continues to increase. Recent attempts to pass a budget (that is almost two years late) has failed. The rating agencies are threatening another round of credit downgrades for the state.
We encourage investors to start putting cash to work over the next 30 days, and/or identify prerefunded bonds that can be sold for income enhancement trades. Please contact us and let us get your portfolio invested at new, elevated levels.
Market News & Credit Update:
For the second straight year, Moody has upgraded more municipal bond ratings than they downgraded. Moody’s has upgraded 563 issuers, while downgrading 489 issuers.
We have been encouraged recently with some credit news from the state of Connecticut. One of the biggest credit problems with the State has been its underfunded pension plans. The State recently approved some changes to the plan that should improve funding levels. Changes are as follows: 1) reduced the assumed rate of return from 8% to 6.9%, 2) Change payroll amortization, 3) Move entry age to align with industry practices. These changes should bring the plan up to 100% funded by early 2030. We feel these could help reverse the negative credit trend the State has been experiencing. It still needs to do a better job of balancing its budget, and increasing economic growth, but this pension change is encouraging.