September 2019 Muni Market Monthly Review –“What Coupon of Choice?”
The anticipated back up in yields finally occurred, after munis reached all-time lows during the first week of September. Muni yields increased in line with taxables roughly 20 to 17 bps. Going forward, muni technicals are turning weak. If you add in some potential adverse political and credit news, there could be an investment opportunity between now and year-end. It is worth holding cash at this time, as the 7-day floating rate is ranging from 1.30% to 1.50%, roughly the same as the 5-year fixed rate muni.
This month, in our credit review, we look at another round of MainLine’s “which coupon is best for you”study. During the month of September, the muni market hit all-time low yields before selling off. MainLine feels this would be a good time to review coupon performance. It is a time-series analysis on OAS (Option Adjusted Spread) and total return results for +5%, 4%, and +3% coupon bonds over six-month and life-to-date periods. Which type of investor are you? We know the coupon that fits.
Muni Market Review
Munis finally sold off during September, after hitting all time low yields during the first week. Yields increased in line with taxables, resulting no real change in relative value between taxables and tax-exempts. Highlights as follows:
- Muni yields increased from 20 to 17 bps, roughly no change in steepness.
- Taxable yields increased from 20 to 17 bps, same as munis with no real change in steepness.
- Supply continues to increase and should continue to outpace 2018 as issuers are finding low borrowing costs.
- 2019 year-to-date versus 2018 is up 8.9%
- 2019 year-to-date versus the last five-year average is down 9.4%
- Year-to-date returns using the Barclays Indices shows the following:
- Muni Bond Index 6.82% (no adjustments for tax)
- US Treasury Index 7.94%
- US Corporate Index 13.42%
- US Mortgage Back Securities 5.68%
We are prepared to invest customer cash balances and start Fund VI between now and year-end, as we think there could be some opportunities as supply continues to increase, fund inflows continue to slowdown, and politics/credit news could cause some alarm.
Read the full Monthly Review here.