A brief monthly update on what's happening in the municipal bond market.

Figure 1: Market snapshotImage Pop Up

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.

Month in review

June was characterized by volatility in the equity market, with stocks pushed and pulled in opposite directions by the gradual re-opening of many states’ economies. This was followed by a surge in new coronavirus cases that has forced at least 19 states to pause reopening efforts. Despite both the S&P 500 and DJIA ending the month just a tick above where they started, each index closed the quarter with its largest quarterly gain in over two decades. After May’s prolonged rally, the AAA Municipal Market Data (MMD) yield curve flattened modestly in June, with shortterm rates up from 1 – 14 basis points (bps) inside of 12 years, and intermediate- and long-term rates down by 1 – 2 bps beyond 17 years. Yields remained flat from the 13-year tenor of the curve to the 16-year tenor, where demand was met with ample supply. The 10-year tenor ended the month at 0.90%.1 June saw $45.3billion in new municipal issuance — approximately $15.8 billion of which was attributable to taxable municipal debt. This marked a significant increase over May’s $29.6 billion figure and signified the highest tally since November 2019.2

  • The Federal Reserve’s rate-setting committee left short-term interest rates unchanged at its June meeting, signaling through its dot plot that it could be years until rates are hiked. Addressing the Municipal Lending Facility, Fed Chair Jerome Powell said the central bank is reviewing the credit thresholds of the program, including a possible expansion to territories that do not qualify under current guidelines.3
  • Municipal bond indices experienced another positive month of returns in June. The Bloomberg Barclays Municipal Bond Index returned 0.82% and the Bloomberg Barclays High Yield Municipal Bond Index returned 3.96%, bringing year-to-date total return for the two indices to 2.08% and –2.64%, respectively.4
  • Muni/Treasury ratios increased at the front end of the curve in June. The one-year ratio ended the month at 156% (up from 65% at the end of May). The two-year ratio ended the month at 180% (up from 100%), the five-year ratio at 141% (up from 127%), and the 10-year ratio at 136% (up from 129%). Ratios remained broadly unchanged in the intermediate portion and long end of the curve, with 15-year ratios holding steady at 119% and the 30-year ratio ending the month at 115% (down from 116%).5
  • Muni/Treasury taxable-equivalent spreads* also increased at the short end of the curve in June. At month-end, spreads equated to 26 bps at the one-year tenor, 31 bps at the twoyear tenor, 40 bps at the five-year tenor, and 86 bps at the 10-year tenor.6
  • June’s secondary market trade activity nearly mirrored that of May. June’s 703,000 total trades reflected just a 2.5% decline from May’s 722,000 trades, while the $244 billion in par traded during the month showed a 4.1% increase from May’s $234 billion.7