March 2018 Monthly Review – Muni GOs – A Gold Standard No Longer?
Munis finally showed some life the final weeks of the quarter, but not after having their worst first quarter performance in 20 years (Bloomberg Barclays Muni index down 1.1%). We are in a technically weak time of year for munis, which is reflected in a high 7–day floating rate of 1.57%. We feel, if the market can get a pick–up in activity, and fund flows remain positive, there could be some good investment opportunities over the next 30 to 60 days. Yes, we still remain optimistic on munis in 2018, but our patience is being tested
It has been over four months since the Tax Cut and Jobs Act bill was passed, creating a charge in the municipal pond. This month, we provide you S&P’s opinion on what these changes will be and their potential impact on credit quality. After reading it and then learning about other changes S&P is making, the biggest credit impact in 2018 (and going forward) has nothing to do with the Act. It has more to do with S&P finally admitting that bonds related to General Obligation pledges may no longer be the “gold standard”.
Muni Market Review
The markets finally ended the month at lower yields than where they began. Munis did a pretty good job rallying at month-end versus taxable rates, but did show slight underperformance . Munis may finally be getting their game on after a lethargic first quarter. Issuance is still light, fund flows remain positive, and ratios are a bit richer but still show some value. Other March market highlights are as follows:
- Muni did suffer their biggest first quarter loss in over 20 years. The Bloomberg Barclays Index was down 1.1% for the first three months, US Treasuries were down 1.2%.
- Muni curve flattened with 5 year rates up 7bps, and 25 year rates down 11 bps.
- Taxable curve flattened with 5 year rates down 4 bps, and 20 year rates down 12 bps. There was a bit of an “out of sync” change in the 25 year rates, only going down 1 bps.
- Issuance remains down 31% versus year-to-date 2017. The 30-day outlook does not have this changing anytime soon.