The muni market had one of its worst months since last summer. In the face of Fed complacency, the heavy new issuance calendar has required higher yields to entice investors to participate. We also feel this weakening trend was more impactful, due to weak seasonal technicals; we expect the market to continue to struggle over the next 30 to 60 days. Highlights of September are as follows:
- Muni yields are up 9 to 19 bps with the 7 and 10-year maturities outperforming. Long-end munis increased 19 bps, 7-year munis increased 4 bps, while 5-year munis increased 16 bps. This curve movement seems a little disjointed and reflects buyers with mixed market views.
- Taxable yields were mixed, with the curve steepening after the Fed refused to raise rates at their September meeting. 5-year rates decreased 4 bps, while 30-year rates increased 8 bps.
- Year-to-date, muni issuance is now where we expected it to be when we made our forecast for 2016. It just took a while to get there. More specifically:
- 2016 September issuance was 186% higher than in 2015. Both new money and refundings were up huge and, like the prior month, set an all-time high in volume.
- Year-to-date, 2016 is running 6% higher than 2015. We expect this difference to continue to increase as refunding volume keeps gaining strength.
- Analysts are forecasting 2016’s issuance to set a new all-time high (excluding 2010 BAB’s inflated numbers), topping 2007’s $430 billion.
- MMA Default trends shows a sharp increase in muni defaults from 2016 versus 2015, due mainly to Puerto Rico:
- 41 issuers to date have defaulted versus 44 in 2015.
- $27 billion in par versus $3.7 billion in 2015.
- Roughly 77% of the defaults year-to-date are from Puerto Rico issuers.
- Illinois credit default spreads continue to widen and have increased 25% since the beginning of the year. The state continues to travel down a troubled road.
We like how the market has been cheapening and are encouraged that investment opportunities will be presenting themselves in the weeks ahead. We feel yield levels will still be historically low, but the value versus taxables is improving. With the glut of issuance, investors can find good quality credits without reaching for yield.
This material has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation to buy or sell. The information herein was obtained from sources which Mainline West Municipal Securities LLC, a member of FINRA and SIPC, and its suppliers believe reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any securities. Any prior investment results presented herein are provided for illustrative purposes only and have not been verified by a third party. Furthermore, any hypothetical or simulated performance results contained herein have inherent limitation and do not represent an actual performance record. Actual factual performance will likely vary and may vary sharply from such hypothetical or simulated performance results. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal bond securities before investing. More information about municipal bond securities is available in the issuer’s official statement or can be found at http://emma.msrb.org.