July 2018 Muni Market Monthly Report –“Munis –Slow and steady wins the race”
The muni market has turned three quiet months into a quiet summer. Slow outperformance and improving market fundamentals should have muni investors feeling good. In fact, MainLine is taking advantage of this positive market and is in the process of winding down its Tax Advantaged Opportunity Fund III. It has been invested for five years, and has exceeded its objectives. We will share its final total return numbers next month.
We have been bragging about muni outperformance for most of 2018, and figured it was time to look at the numbers versus other US asset classes. We took the easy way by using the Bloomberg/Barclays indices and tried to fix some of the flaws in comparing 10-year total returns. MainLine is not active in indexing and comparing results; we feel each portfolio should be designed for that investor’s objective, but it is always good to see how munis stack up as an asset class. The results did not surprise us, but may surprise the uneducated investor. An investment does not have to be first in total return every year to be the best over the last ten years. Sometimes, slow and steady wins the race!
Muni Market Review
Another uneventful month in munis has now led to a quiet summer. Munis continue to slightly outperform, and headlines remain positive. Highlights for the month of July:
- Muni yields changed from -2 to -4 bps for munis less than 10 years in maturity, + 5 to +8 bps for longer-term munis. The curve steepened roughly 10 bps, reflecting the strong demand for bonds in the short-end of the curve.
- Taxable yields increased across the curve 15 to 9 bps, with the curve flattening.
- Munis are now looking rich from 7 years and in, fair value at 10 years, cheap 15 years and longer.
- Issuance remains down 15% versus year-to-date 2017, but may finally be picking up.
- Credit ratings on the state of Illinois and Chicago have finally stabilized, according to the rating agencies. Illinois has a stable outlook; Chicago was upgraded.