SUMMARY

  • Investment grade municipal bonds retreated in August – their first month of negative returns since April – while lower-rated issues gained ground.
  • Although performance was mixed, the municipal market saw nearly $12 billion in August inflows – including the second-highest weekly total in a decade.
  • Elevated taxable supply in late August, coupled with expectations for net positive supply in September, spurred the first monthly pickup in municipal yields since June.

Figure 1: Market snapshot

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

The U.S. stock market continued its upward charge in August, with major equity benchmarks posting their strongest month since April. In the municipal market, elevated supply triggered the reversal of a nearly two-month downward trend in yields. Investors saw municipal yields end the month up from 3 to 19 basis points (bps) as the AAA Municipal Market Data (MMD) curve steepened. The 10-year tenor closed out August at 0.81%, up 16 bps from July’s historic month-end low of 0.65%.1 Taxable municipal debt continues to represent a sizable component of total issuance in this low rate environment, comprising nearly one-third of the robust $41.3 billion brought to market in August. Year-to-date issuance now totals $293.9 billion, with taxable issuance accounting for $86.6 billion.2

  • At the Jackson Hole economic symposium last month, Federal Reserve Chair Jerome Powell announced significant changes to the central bank’s policy-setting framework as it relates to inflation. Rather than targeting a static 2% inflation level, the Fed will now seek to compensate for past misses of the target by temporarily allowing inflation to run modestly above 2% as conditions warrant. The shift likely signals the Fed’s intent to leave U.S. interest rates very low for the long term. Fed Vice Chairman Richard Clarida said a re-evaluation of the Fed’s framework was necessary as policy makers will have less room to spur growth by reducing borrowing costs in a near-zero rate environment.3
  • Investment grade municipals and high yield municipals moved in opposite directions in August. While the Bloomberg Barclays Municipal Bond Index was down 0.47% for the month, the Bloomberg Barclays High Yield Municipal Bond Index returned 0.26%. Year-to-date total returns for the two indices now stand at 3.31% and 0.27%, respectively.4
  • With August’s increase in the one-year municipal/Treasury ratio, this figure now stands at 100% or greater across all tenors of the curve. The one-year ratio ended the month at 125% (up from 92% at the end of July), the two-year ratio ended the month at 123% (up from 118%), the five-year ratio at 100% (down from 105%), and the 10-year ratio at 114% (down from 120%). Further out along the curve, ratios decreased slightly with the 20-year ratio ending the month at 110% (down slightly from 119%) and the 30-year ratio at 106% (down slightly from 114%).5
  • Municipal/Treasury taxable-equivalent spreads* increased modestly in August. At month-end, spreads equated to 13 bps at the one-year tenor, 14 bps at the two-year tenor, 18 bps at the five-year tenor, and 66 bps at the 10-year tenor.6