SUMMARY

  • Municipal bonds continued to rally in July, with the Bloomberg Barclays Municipal Bond Index up 1.68% for the third straight monthly gain.
  • Driven in part by strong retail demand and significant reinvestment, short-term rates finished the month down 14–18 basis points while rates beyond five years finished down 22–26 basis points.
  • Municipal bond issuance reached its highest level for the month of July in three decades, spurred largely by historic levels of taxable issuance comprising more than one-third of the $42.6 billion total.

Figure 1: Market snapshot

Month in review

While the U.S. economy experienced modest growth in May and June, real U.S. GDP declined at a seasonally adjusted annualized rate of 32.9% in the second quarter, marking the steepest sequential decline in more than 70 years of record-keeping. In the municipal market, strong retail demand, significant reinvestment, and seasonal tailwinds in July drove yields lower across the AAA Municipal Market Data (MMD) curve in a bull flattener. Short-term rates ended the month down 14–18 basis points (bps), while rates beyond five years ended the month 22–26 bps lower. The 10-year tenor closed out the month at a historic low of 0.65%.1 The low absolute rate environment inspired municipal issuers to continue to tap into the taxable market. In fact, of the $42.6 billion of new money brought to market in July by an active primary market, taxable municipal debt accounted for $16.1 billion. Year-to-date taxable issuance has now surpassed the total for all of 2019.2

  • No new policy action was announced at the conclusion of the Federal Reserve’s two-day meeting in July. Fed Chair Powell reiterated the central bank’s pledge to support the economy, but emphasized that any future action will be determined by the course of the pandemic and its effects on the economy. Earlier in the month, the Fed announced modifications to the Main Street Lending Program, including the expansion of access to credit for nonprofit organizations with as few as 10 employees. Certain municipal issuers will likely now be eligible.3
  • Sustained demand for municipal bonds resulted in yet another month of positive returns for broad-market muni indices. In particular, the Bloomberg Barclays Municipal Bond Index advanced 1.68% in July and the Bloomberg Barclays High Yield Municipal Bond Index returned 2.72%, bringing year-to-date total returns for the two indices to 3.80% and 0.00%, respectively.4
  • Muni/Treasury ratios compressed in July – most significantly at the front end of the curve. The one-year ratio ended the month at 92% (down from 156% at the end of June), the two-year ratio ended the month at 118% (down from 180%), the five-year ratio at 105% (down from 141%), and the 10-year ratio at 120% (down from 136%). Further out along the curve, ratios remained relatively unchanged with the 20-year ratio ending the month at 119% (down slightly from 122% and the 30-year ratio at 114% (down slightly from 115%).5
  • Muni/Treasury taxable-equivalent spreads* also decreased in July. At month-end, spreads equated to seven bps at the one-year tenor, 11 bps at the two-year tenor, 17 bps at the five-year tenor, and 56 bps at the 10-year tenor.6
  • Secondary market trade activity decreased for the fourth consecutive month in July, with 659,000 total trades marking the lowest figure since February. Par traded in the secondary market during July totaled 245 billion, in line with June’s $244 billion traded.7