Munis began 2020 the way they left off in 2019, with high demand, low supply, and solid credit quality. Taxable issuance continues to grow, as issuers feel borrowing at taxable rates will provide them long-term cost savings, versus waiting a few years and paying tax-exempt rates. MainLine remains constructive on munis but, given our 2020 outlook, the noise of the fall election is getting louder thanks to the Iowa caucus “complications” and the never-ending daily news of climate change risk. We wonder when munis will finally stumble.
In this month’s credit report, we detail concerns with climate change and its potential impact on the municipal market. We also discuss our process to help ensure your Sleep Well at Night portfolio will be prepared if and when climate changes occur. I guess you could say MainLine is planning to add a little Green to your SWAN portfolio.
Muni Market Review
A strong US Treasury rally helped move muni yields lower in January. By month end, munis had underperformed, but versus historical relationships, they performed well. Munis moved 70% of the US Treasury changes versus the long-term average of 60%. January highlights are as follows:
- Muni yields are lower across the curve from 25 to 29 bps.
- Taxable yields were lower across the curve from 38 to 41 bps.
- Muni inflows remain strong with close to $12 billion YTD 2020. This is almost twice the amount versus YTD 2019 ($7.1 billion).
- Supply continues to remain elevated versus history:
- 2020 year-to-date versus 2018 is up 24% and is flat versus the five-year average.
- 2020 refunding is up 49% from 2019, with 66% being taxable bonds versus 46% taxable in 2019.