Figure 1: Market snapshot

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Month in Review

  • High yield municipal bonds outperformed investment grade munis in October, although both segments are in positive territory for the year.
  • October saw the highest monthly municipal issuance since 2017, as issuers rushed to bring deals to market prior to the election.
  • Despite the elevated supply, robust investor demand kept municipal yields contained in October.

    In the final weeks of October, major U.S. stock indices tumbled on election uncertainty, rising coronavirus infections, and renewed lockdowns. By month end, the S&P 500, DJIA, and Nasdaq Composite were all down more than 2%.Footnote1 Meanwhile in the municipal market, elevated supply of both tax-exempt and taxable municipal debt remained the primary story as issuers rushed to pull forward deals that would typically come to market in November during a non-election year. In total, October brought $65.2 billion of new issuance to market – the highest monthly figure since December 2017.Footnote2 As a result, municipal yields, represented by the AAA Municipal Market Data (MMD) curve, shifted upward across the entire curve. Yields inside of 10 years increased from 4-9 basis points (bps), while yields beyond 10 years closed the month up by 8-9 bps.Footnote3 After weeks of steady supply in the primary market, however, 30-day net supply is set to turn negative, with maturities far outstripping new supply as we head into the holiday season.Footnote4

    • The Federal Reserve’s most recent policy meeting fell during the first week of November. Discussion was focused primarily on further methods to support the U.S. economy in the face of increasing coronavirus infections and renewed lockdowns, despite major U.S. stock market indices pushing record highs. Fed Chair Powell noted, “Economic activity has continued to recover… [but] the pace of improvement has moderated.” The Fed reiterated its commitment to provide sustained stimulus as needed, but indicated comfort in current policy and
      guidance.Footnote5
    • New York’s Metropolitan Transportation Authority (MTA) announced plans to tap the Federal Reserve’s Municipal Liquidity Facility for a second time. This time, the MTA plans to borrow all ~$2.9 billion of remaining funds available through the program. With the MLF program set to expire in December and uncertainty surrounding its extension, the MTA is seeking help to cover an estimated $12 billion two-year budget deficit. According to the Authority’s chief financial officer, the MTA would pledge payroll mobility tax revenues.Footnote6
    • Investment grade municipals and high yield municipals moved in opposite directions in October. The Bloomberg Barclays Municipal Bond Index returned -0.30% for the month, bringing its year-to-date total return to 3.02%, while the Bloomberg Barclays High Yield Municipal Bond Index gained 0.18%, bringing its year-to-date total return to 0.54%.Footnote7
    • Following a month in which municipal yields increased across the curve and the Treasury curve experienced a bear steepener, municipal/Treasury taxable-equivalent spreads* increased modestly at the front end and decreased slightly at the long end of the curve in October. At month-end, taxable-equivalent spreads equated to 21 bps at the one-year tenor, 13 bps at the five-year tenor, 72 bps at the 10-year tenor, and 127 bps at the 30-year tenor.Footnote8
    • Secondary market trade activity increased for the second straight month in October, with 679,000 total trades (up from 630,000) and $252 billion par traded (up from $218 billion).Footnote9