SUMMARY

  • As the global economy grapples with a recession caused by the COVID-19 pandemic, the AAA municipal yield curve ended notably steeper in April than at the end of March.
  • New Federal Reserve lending facilities aimed at providing funds to banks, companies and municipalities represented an unprecedented use of its emergency powers.
  • While municipal bond indices fell for the second straight month, losses were less steep than in March, and issuance increased slightly from March’s two-year low.
  • Municipalities have proven resilient in past periods of fiscal stress, and while there is potential for cuts and revenue losses, we believe that high quality muni obligors will navigate through these difficult times.

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

Following another volatile month as the global economy continued to grapple with a swift shift into recessionary territory due to the COVID-19 pandemic, the AAA Municipal Market Data (MMD) yield curve ended April notably steeper than at the end of March. Yields on the short end of the curve were down as much as 24 basis points (bps) relative to March month-end, with the one-year tenor down to just 0.81%. Yields on the long end of the curve were up as much as 29 bps, with the 30-year tenor up to 2.26%. The inflection point came at the five-year tenor of the curve, where the 1.09% yield figure from 30 April remained unchanged from 31 March.1 April total municipal bond issuance of $23.8 billion — approximately $4.3 billion of which was attributable to taxable municipal debt — showed a slight rebound from March’s $18.6 billion. Though March muni issuance marked the lowest monthly figure since February 2018, April reported the third-lowest over the same time period.2

  • The Federal Reserve strengthened its efforts to support the U.S. economy, expanding quantitative easing programs and announcing numerous new lending facilities in an effort to provide funds to banks, companies, and municipalities in an unprecedented use of its emergency powers.3
  • Municipal bond indices were down for the second straight month, though losses were of a lesser magnitude than in March. The Bloomberg Barclays Municipal Bond Index returned -1.26% and the Bloomberg Barclays High Yield Municipal Bond Index returned -3.37%, bringing year-to-date total return for the two indices to -1.88% and -10.02%, respectively.4
  • As Treasury yields remained relatively flat while the muni curve steepened in April, muni/Treasury ratios decreased on the short end of the curve and increased on the long end. With ratios remaining elevated relative to pre-pandemic levels, the one-year ratio ended the month at 476% (down from 700% at the end of March), the two-year ratio at 479% (down from 482%), the five-year ratio at 321% (up from 295%), and the 10-year ratio at 236% (up from 196%).5
  • Muni/Treasury taxable-equivalent spreads* also decreased on the short end and increased on the long end in April. At month-end, spreads equated to 120 bps at the one-year tenor, 135 bps at the two-year tenor, 150 bps at the five-year tenor, and 185 bps at the 10-year tenor.6
  • While March experienced the highest secondary market trading levels since 2008, April secondary market trading remained elevated but to a slightly lesser degree. The month’s 892,000 total trades and $279 billion in par traded marked the second- highest figures since October 2018.7