November 2018 Muni Market Monthly Report – “11 Fund Spotlight on Basis Risk”
The muni market regained its footing in November, as mid-term election concerns dissipated and fund flows returned to positive. Munis are back on the strong fundamental path we have seen in 2018. We anticipate an orderly year-end, as issuance remains manageable and credit news positive.
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 always highly discussed with the Funds is Basis Risk. We also like to think of it as “Basis Opportunity”. In this month’s credit review, we will discuss the threat and opportunity that basis risk provides to the Funds and how our investment strategy looks to mitigate this risk, while potentially enhancing the Funds’ returns by taking advantage of it.
Muni Market Review
November saw munis outperform Treasuries. The mid-term elections brought no surprises, fund flows have turned back positive, and munis appear to be back on solid ground. More specifically:
- Muni yields decreased from 16 to 24 bps with the intermediate part of the curve outperforming.
- Taxable yields decreased from 10 to 15 bps with the curve flattening.
- Year-to-date, muni issuance remains low versus 2017 (-16%) and over the last five years (-3%). Early year 2019 estimates show lower than average levels, and close to 2018.
- Since the beginning of 2018, muni yields have increased roughly 80% of taxables. Annual muni yield increases are as follows:
- 5 years 46 bps
- 10 years 53 bps
- 25 years 67 bps
We anticipate an orderly year-end for the muni market, as issuance remains low and credit news positive.