March 2019 Muni Market Monthly Report –“Fund Spotlight”
The muni market outperformed taxables during the month of March. This is unusual, as the muni market rarely outperforms taxables in a strong rally. Muni issuance remains below long-term levels, inflows remain positive and credit news seems encouraging, fueling munis to possibly be in an over-bought position for the moment. We are looking for a slight cooling off before what could be a strong summer of performance.
In this month’s Municipal Credit Review, we put a spotlight on the Funds. As we are talking with investors about Fund VI, one of the topics that is usually discussed is what NAV volatility should be expected, and what is the probability we will need to call the 30% deleveraging capital. We cannot guarantee when (and if) it will be needed, but we can look at the history of NAV changes and estimate when it is most likely to be called and why.
Muni Market Review
Last month, the muni market had the largest rally since 1990, with price gains exceeding 2.2% according to MMA (Muni Market Analytics). Munis outperformed taxables, as concerns with the Fed are now leaning back to a possible easing in late 2019, and some overseas bond markets returned to negative yields. More specifically:
- Muni yields decreased from 10 to 38 bps with the curve flattening 28 bps.
- Taxable yields decreased from 29 to 30 bps with the curve remaining unchanged.
- Year-to-date, muni issuance remains low versus the last five years (-29%), but now up slightly from 2018 (15%). This low issuance, combined with eleven straight weeks of positive cash flows, is fueling strong muni performance.
- The 7-day muni floating rate index traded at roughly 60% of 1-month Libor. The average is 70%; current levels show the strong demand for money market investments from the cash flows into munis. At some point, this will be invested into the muni market.