Municipal Bonds: Breaking Down The Strength In The Market In 2021
In 2021, municipal (“muni”) bonds have been a tough asset class to manage due to overwhelming demand and limited supply in the market. Fundamentally, there are a few reasons for these conditions, and we’ll take a look at some data points to bring the bigger picture into focus.
- Investor expectations of higher taxes have been a primary underlying force behind the surge of cash flowing into municipals. Asset allocation models for investors in a higher tax bracket have likely been adjusted to reflect a higher tax rate because mutual funds and ETFs (exchange-traded funds) in the municipal space are flush with new money.
- The stimulus bill signed in March pledged $350 billion for state and local governments, $170 billion for education and $20 billion for public transit. If we are looking at muni yields as a percentage of Treasury yields, the stimulus package seems to have assuaged many of the COVID-19-related credit concerns that were at the forefront throughout 2020. Muni prices have sustained the recent increase in treasury volatility extremely well pushing AAA muni/Treasury ratios to historic lows.
The two charts below compare the AAA Bloomberg 30-year muni valuation and 10-year Bloomberg muni valuation to the 30-year and 10-year Treasury rate respectively. In 2021, the average 30-year muni has yielded 76% of Treasury, and the average 10-year muni yield has been 64.4% of Treasury. If we extend this ratio back 20 years, the average 30-year was 103.9% of Treasury and the average 10-year was 95.44% of Treasury during that period, with outliers in the 2008 crash and at the start of the pandemic in March of last year.
Source: Bloomberg | Past performance is not indicative of future results.