SUMMARY

  • Representing a highly volatile month for the muni market, the 10-year AAA MMD yield reached its highest level since 2013, only two weeks after hitting all-time lows.
  • In the face of challenging economic and market conditions, Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the Fed intervened in the municipal market.
  • In just 10 trading days, muni yields relative to Treasuries moved to their highest levels on record.
  • We continue to diligently monitor the pandemic’s effect on municipal credit quality in an effort to protect against downside risk and uncover opportunity in clients’ muni bond portfolios.

IMPORTANT NOTICE: Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real-time market developments. All opinions are subject to change without notice.

Figure 1: Market Snapshot

Month in review

Against the backdrop of the COVID-19 pandemic, the AAA Municipal Market Data (MMD) yield curve ended the highly volatile month of March with yields up 33–47 basis points (bps) relative to February month-end. Coming less than two weeks after AAA MMD yields reached all-time lows, with the 10-year tenor hitting 0.78% on 9 March, a significant sell-off caused the 10-year AAA MMD yield to reach its highest level since 2013 at 2.79%.1 March total municipal bond issuance of $17.0 billion — approximately $3.0 billion of which was attributable to taxable municipal debt — represented a dramatic decline from February’s $40.6 billion and was the lowest monthly issuance figure since February 2014.2

  • The Federal Reserve cut short-term interest rates twice in March, initially by 50 bps at an emergency policy meeting on 3 March, and then by an additional 100 bps on 15 March. As part of its multi-faceted approach to combat the growing threat of a U.S. and global recession, the Fed also announced the reintroduction of quantitative easing measures, pledging to purchase at least $700 billion in Treasury and mortgage-backed securities.3
  • Municipal bond indices were down on the month, with high yield municipals taking the biggest hit, following the mid-March municipal bond sell-off. The Bloomberg Barclays Municipal Bond Index returned -3.63% and the Bloomberg Barclays High Yield Municipal Bond Index returned -11.00%.4
  • As Treasury yields declined and muni yields increased through March, muni/Treasury ratios spiked across the curve. The one-year ratio ended the month at 700% (up from 73% at the end of February), the two-year ratio at 482% (up from 83%), the five-year ratio at 295% (up from 80%), and the 10-year ratio at 196% (up from 82%).5
  • Muni/Treasury taxable-equivalent spreads* also soared in March. At month-end, spreads equated to 162 bps at the one-year tenor, 157 bps at the two-year tenor, 147 bps at the five-year tenor, and 157 bps at the 10-year tenor.6
  • March secondary market trading reached the highest levels since 2008, as the month’s 1,104,000 total trades and $515 billion in par traded marked the largest such figures since October 2008 and March 2008, respectively.7