SUMMARY
- Major trends that characterized the municipal market through 2019, including strong returns, positive fund flows, and elevated issuance of taxable munis, held true in December.
- Net inflows into municipal mutual funds in 2019 totaled $93.6 billion – including $868 million in December – setting an all-time record.
- The Bloomberg Barclays Municipal Bond and High Yield Municipal Bond indices returned 0.31% and 0.30% in December, respectively, bringing 2019 total returns to 7.54% and 10.68%, respectively.
Month in review
Monthly municipal bond issuance in December totaled $40.8 billion, surpassing $40 billion for the third month straight and bringing total 2019 issuance to $422 billion. Issuance in 2019 – the fourth-highest of the decade – exceeded 2018 issuance by more than $80 billion. Taxable issuance accounted for $85.5 billion of total 2019 issuance, of which $70.5 billion were municipal cusips and $15 billion were corporate cusips.1 The AAA municipal yield curve remained relatively unchanged over the month, with yields on bonds 10 years and under falling by no more than 6 basis points (bps) and yields on bonds out to 30 years increasing by no more than 3 bps.2
- As expected, the Federal Reserve left interest rates unchanged at its December meeting, the first such Fed decision since the spring to receive unanimous support among voting members. The Fed is currently evaluating how its rate cuts have affected the economy and will reconvene in the final week of January.3
- The Bloomberg Barclays Municipal Bond and High Yield Municipal Bond indices returned 0.31% and 0.30% in December, respectively. These figures brought 2019 total returns to 7.54% for the Municipal Bond Index and 10.68% for the High Yield Municipal Bond Index.4
- Muni/Treasury ratios remained level or dipped across the curve in December. The two-year ratio was unchanged, while the 10-year ratio declined to 75% from 83%.5
- December’s primary market issuance of $40.8 billion – including $11.3 billion in taxable municipal issuance – represented a 12.6% decrease from November 2019, but an 85.7% increase compared to December 2018.6
- After a slow November, secondary market monthly trade volume rose in December, with par traded totaling $233 billion ($2.90 trillion YTD) and quantity of trades totaling 640,000 (8.73 million YTD).7
Muni technicals in focus: Looking back and looking forward
Major trends that characterized the municipal market through 2019, including strong returns, positive fund flows, and elevated issuance of taxable munis, held true in December. The Bloomberg Barclays Municipal Bond Index delivered a gain of 0.31% on the month as the municipal yield curve experienced a modest steepener, contributing to full-year returns of 7.54%.8 Net inflows into municipal mutual funds in 2019 totaled $93.6 billion – including $868 million in December – setting an all-time record.9 December’s $40.8 billion in new issuance brought the year-end total to a robust $422 billion.10
Of 2019’s total new issuance, $70.5 billion was attributable to taxable municipal debt, a record since the Build America Bond program expired in 2010.11 Moreover, refunding of tax-exempt into taxable debt further reduced the amount of tax-exempt muni debt outstanding, contributing to positive technicals for muni investors.
Analysts expect the recent trend of strong supply and the boom in taxable issuance to persist into 2020 if interest rates remain range-bound. Forecasts for new issuance fall in the range of $415 billion–$440 billion, with $74 billion–$115 billion of this total expected to be taxable issuance.12 Materially higher interest rates, however, would render it generally uneconomical to execute advance refundings with new issuance of taxable debt, while lower interest rates could accelerate the trend in taxable issuance. These refunding dynamics provide for an elevated level of uncertainty around forecasts for taxable issuance and thus total new issuance as well.
On the economic front, new data released by the Federal Reserve Bank of Philadelphia painted a mixed picture for regional economies. While state leading indexes in the West and Southeast regions appeared bullish, nine states concentrated in the Midwest and Northeast posted negative readings.13 This marked the highest volume of states with negative state leading indexes since July 2009.14 As the current record-long economic expansion continues to age, the potential for economic decoupling of states and localities warrants surveillance for municipal investors in 2020 and beyond.
To learn more about investing in municipals at PIMCO, please visit pimco.com/munis
1 The Bond Buyer: Primary Market Statistics – A Decade of Bond Finance, 31 December 2019
2 Thomson Reuters TM3 MMD Interactive Data, 31 December 2019
3 Michael Derby, “December Sees Unanimous Fed Support For Steady Rates,” The Wall Street Journal, 11 December 2019
4 Bloomberg Barclays, 31 December 2019
5 Thomson Reuters TM3 MMD Interactive Data, 31 December 2019
6 The Bond Buyer: Primary Market Statistics – A Decade of Bond Finance, 31 December 2019
7 The Bond Buyer: Secondary Market Data, 31 December 2019
8 Bloomberg Barclays, 31 December 2019
9 Lipper, 31 December 2019
10 Aaron Weitzman, “Munis finish 2019 with a robust $421B, including $67B of taxable,” The Bond Buyer.com, 31 December 2019
11 Ibid
12 Vikram Rai et al., “2020 Municipal Market Outlook: The Poisoned Rose,” Citi Research, 12 December 2019; Peter DeGroot et al., 2020 Municipal Market Outlook: White Knuckle Finish,” J.P.Morgan, 26 November 2019; Mikhail Foux et al., “Muni 2020 Supply Outlook,” Barclays, 20 November 2019; Michael D. Zezas et al., “2020 Muni Outlook Munis: They Get The Job Done,” Morgan Stanley Research, 18 November 2019; Ying-Chen Li et al., “Municipals Year Ahead 2020: Is this not why you are here?” BofA Global Research, 11 December 2019.
13 Federal Reserve Bank of Philadelphia State Leading Indexes, 31 December 2019
14 Alexandre Tanzi, “Nine States Face Economic Contraction, Most Since 2009 Crisis,” Bloomberg, 2 January 2020
DISCLOSURES
A word about risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax; a strategy concentrating in a single or limited number of states is subject to greater risk of adverse economic conditions and regulatory changes.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.
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