May 2019 Muni Market Monthly Report –“Muni Summer Technicals and Market Performance”
A strong Treasury rally during the month of May, for various questionable (and unquestionable) reasons, helped munis continue to rise in price. Although munis greatly underperformed, we still see a positive trend for the next 30 to 60 days. Simply put, there is too much cash chasing too few bonds.
Entering the summer months of 2019, supply and demand technicals look strong for munis. This fundamental seasonal effect comes about from a mismatch of new bond issuance and bond proceeds (calls, coupon payments and maturities) that happens every summer. This month, we look at how this seasonal effect has impacted muni performance and its relationship with taxable bonds. There is an estimated $17 billion of net cash available for investing after planned new issuance this summer. Does this guarantee outperformance and price appreciation for munis?
Muni Market Review
The muni market continues to rally in 2019, but finally could not keep up with the crazy-strong taxable market. Investors feel the economy is going to slow down and there will be rate cuts in the second half of the year. This, combined with stock market losses, has spurred the strongest 1-month rally since 2008 in US Treasuries. Highlights of the muni market performance in May are as follows:
- Muni yields were down 19 to 23 bps, and an influx of cash is dampening the 7-day floating rate to roughly 58% of 1 month Libor. The historic average is at 70%. This reflects the amount of cash waiting to buy longer-term munis.
- Taxable yields were down 40 to 41 bps.
- Inflows into muni mutual funds have been positive every week since the first week of January. This, combined with an estimated negative $17.2 billion in net supply, has the muni market looking for bonds.
- Year-to-date, muni issuance has picked up and is now higher than YTD 2018, but it remains low versus recent history:
- 2019 is up 1.3% versus 2018.
- 2019 is down 27.2% versus the last 5 years’ average.
Things continue to look technically and fundamentally strong for positive muni performance over the next 30 to 60 days. The current NAVs of the Tax Advantage Opportunity Funds are elevated and total returns impressive, but the prospects for deployment Fund VI does not appear imminent.
Read the full Monthly Review here.