SUMMARY

  • In the wake of October’s record supply, municipal issuance largely evaporated in November, even as demand remained robust.
  • Treasury Secretary Steven Mnuchin signaled his intent to allow the Municipal Liquidity Facility to expire at the end of the year; however, it remains to be seen if the facility will be revived under the Biden administration.
  • Optimism around COVID-19 vaccines improved the credit outlook for key municipal sectors in November, including airports and transportation.

Figure 1 is a market snapshot table displaying yield and spread data as of 30 November 2020 for municipal bond markets and U.S. Treasury markets in maturities of 2, 5, 10, and 30 years. It also displays year-to-date data on municipal market issuance, fund flows, and index returns. Key takeaways are discussed in the copy within the article. Image Pop Up

Month in Review

The U.S. stock market surged in November, erasing October’s losses even amid a rising number of coronavirus infections. Propelled by progress toward potential coronavirus vaccines and hopes for a relatively smooth transition to power for president-elect Joe Biden, major U.S. equity indices closed the month with double-digit gains. Footnote1 Meanwhile, the municipal market was characterized by a falloff in supply and robust demand. In the wake of October’s $72+ billion of issuance, just $18.8 billion was brought to market in November, of which $4.8 billion was taxable. Monthly issuance not only fell to its low-water mark for the year, but also represented the weakest monthly figure since February 2018. Footnote2 Decreased supply, coupled with increased demand for longer-duration bonds, resulted in a bull flattener for the AAA Municipal Market Data (MMD) curve. Yields dropped by 5-7 basis points (bps) inside of 5 years, by 11-21 basis points from 6-10 years, by 23-29 bps from 11-15 years, and by 30 bps beyond 15 years. Footnote3 Entering the holiday season, net negative supply may provide a tailwind for the municipal market as we close out 2020.

  • Treasury Secretary Steven Mnuchin indicated that he has no intention of renewing the Municipal Liquidity Facility (MLF) for the forthcoming year. Footnote4 The lending facility, which serves as a backstop for struggling municipal issuers, is currently set to expire at the end of the year, although it could be resuscitated in 2021 under the Biden administration. While the MLF has remained broadly underutilized due to its steep borrowing costs – only the state of Illinois and New York’s Metropolitan Transportation Authority have tapped it – the move still surprised many market participants. Federal Reserve Chairman Jerome Powell previously expressed support for an extension of the MLF, and the Fed responded to Mnuchin’s decision with a statement signaling its disappointment.
  • Municipal bonds generated relatively strong performance in November. The Bloomberg Barclays Municipal Bond Index returned 1.51% for the month, while the Bloomberg Barclays High Yield Municipal Bond Index gained 2.40% and the Bloomberg Barclays Taxable Municipal Index gained 1.91%. Year-to-date returns for the three indices currently stand at 4.58%, 2.96%, and 9.33%, respectively. Footnote5
  • Treasuries also experienced positive performance in November, although they underperformed municipals, leading to a tightening in municipal/Treasury taxable-equivalent spreads.* At month-end, taxable-equivalent spreads equated to 13 bps at the one-year tenor (down from 21 bps), 3 bps at the five-year tenor (down from 13 bps), 38 bps at the 10-year tenor (down from 72 bps), and 80 bps at the 30-year tenor (down from 127 bps). Footnote6
  • Secondary market trade volume sank to its lowest level in more than a decade. Trades for the month of November totaled just 549,000 (down from 679,000 in October) while par traded amounted to just $159 billion (down from $252 billion). Footnote7