May 2018 Muni Market Monthly Report – ‘Summertime in Muniland’
In May, we experienced the strong muni market performance that was expected earlier in the year. We think this is just the beginning and feel munis will be the “summer place” for investors. Munis outperformed taxable rates by declining twice as much as taxables during the month of May. Lack of supply, strong technicals, and improving credit quality perceptions have munis in a nice spot for the near-term.
As you make plans for the summer, we would recommend booking a visit to Muniland. We feel munis are technically set up well and have a solid foundation for good performance in the next 60 to 90 days. It’s all about a cool summer demand breeze, sun rising on the rollback of regulations, no credit hurricanes on the horizon, and low cost to finance the journey. As a muni investor, we recommend being all-in for at least the next 60 to 90 days and then enjoying a little more summertime.
Muni Market Review
The muni market is finally starting to show the strong performance we expected a little earlier in the year. Munis outperformed taxables by close to 2 times. Highlights of May are as follows:
- Muni yields decreased from 8 to 22 bps, with the curve moving at the ends. Ten-year was the biggest underperformer, with five and thirty year maturities the big outperformers.
- Taxable yields decreased from 7 to 9 bps, with the curve staying the same.
- Munis are starting to look rich versus current ratios, but still remain a good value versus longer term comparisons.
- Issuance is down 22% versus year-to-date 2017. This does not look like it will be changing and we feel will be a big reason for outperformance, given anticipated strong demand over the next 60 to 90 days.
- There have been big decreases in credit default swaps spreads over the last year for some states, signaling there is an improved perception of their credit quality:
- California from 53 to 32 bps.
- New Jersey from 175 to 77 bps.
- Illinois from 408 to 230 bps.