June 2018 Muni Market Monthly Report – Fund I and the 2008 Economic Crisis – A Case Study
The muni market lethargically made its way through the month of June. The month was highlighted by low issuance, a modest rise in yields, and positive regulatory and political news. Illinois and New Jersey passed budgets on time, which lent itself to strength in those bonds . Further, the Supreme Court ruled on two major cases that were both positive for the muni market. We remain bullish on munis, as cash from maturing bonds grows and issuance remains below average.
At the request of an investor, we have used this month’s monthly review to conduct a case study on Mainline West Tax Advantaged Opportunity Fund I and its performance during the economic crisis of 2008. This gives us a chance to share with you how the Fund performed, and how its investment strategy and proprietary structure became “battle-tested”. It also allows us to reflect and think about the lessons that were learned during one of the worst economic and municipal market crises ever. It is a case study on how conservative, principled investing, paired with a robust hedging strategy, can weather severe market volatility.
Muni Market Review
The muni market had a quiet month of June characterized by low issuance, a modest increase in yields, and good news from the regulatory and political landscapes in muni land. Highlights of June were as follows:
- Muni yields increased from 2 to 7 bps, with the curve steepening a bit .Long-term munis represent good value versus the taxable market.
- Taxable yields increased from 0 to 3 bps, with the curve staying the same.
- Issuance remains down 19% versus year-to-date 2017 and appears to be slowing.
- The state of Illinois and New Jersey have both announced they have passed budgets for the upcoming year. For the first time in years, sentiment on these states has turned bullish and bonds in these states are outperforming the municipal market. We were ahead of this, and have been buyers during 2018.
We remain bullish on munis, as we feel they remain fundamentally and technically strong for the near-term. There are pockets of strength in the market that should spread as cash builds and issuance remains significantly below the amount of maturing bonds. We have seen good spread tightening in Illinois, California, and high yield bonds.