September 2018 Muni Market Monthly Report –“World Demand? Yes Please!”
In a time of seasonally weak technicals, munis outperformed taxables with a yield increase of 80% of taxable equivalents. Lower than expected issuance and perceived stronger credit quality have munis the darling of the fixed income world in 2018. We continue to see good fundamentals for munis, going forward, but caution that some of these are temporary and, at some point, sentiment will change.
Individual investors either direct or indirect (through a mutual fund), remain the biggest and most consistent investors in muni market, owning 68% to 72% of total muni holdings. Insurance companies and banks are also active participants. However, the recent decrease in corporate tax rates have many concerned that demand would be adversely impacted. Now, there is a new, fast growing investor to the muni world -international buyers, who have a preference for taxable munis, but are also interested in tax-exempts. This month, we look into how these muni buyers are affecting demand in the $3.5 trillion muni market.
Muni Market Review
In September, the muni market saw rates rise as the economy looks to be picking up speed and the Fed is forecasting more rate increases in the near future. Munis outperformed taxable rates, even though they were in a technically weak seasonal time period. Highlights as follows:
- Muni yields increased as follows:
- 5 year yields up 18 bps
- 10 year yields up 14 bps
- 15 year yields up 12 bps
- 30 year yields up 17 bps
- Taxable yields increased as follows:
- 5 year yields up 19 bps
- 10 year yields up 20 bps
- 15 year yields up 21 bps
- 30 year yields up 18 bps
- Year-to-date, muni issuance was starting to pick up, but seems to have hit another rut. Total issuance still lags 2017’s by 14.1%.
- Credit Default Spreads (CDS) continue to tighten, telling investors that the markets think munis are safer for principal protection than they thought one year ago. For example CDO spreads have tightened as follows:
- California 45%.
- New Jersey 40%
- Illinois 41%
- State Average 23%
Now that the final payout have been made for Fund III, MainLine is beginning the process of raising capital for Fund VI! Please let us know if you have interest. Its investment timeline is more focused on when the opportunity occurs, as opposed to a specific date. You will want to be in line when this happens.