Municipal Fixed Income Weekly - November 18, 2016
The municipal bond market took a thrashing last week, as high-grade tax-exempt interest
rates gapped considerably higher across the term structure. The S&P AAA Municipal
Yield Curve bounded by 18 basis points (bps), or 0.18%, equally at the 1- and 2-year
marks, while the 3-year maturity rose by 22bps (Figs. 1 & 2). Both the 5- and 7-year
tenors were weaker by 32bps, and the 10- and 15-year yields increased by 33 and 28bps,
respectively. The 30-year spot leapt higher by 27bps, to steepen the curve by 9bps for the
week, front to back (Fig. 3).
As Figure 1 demonstrates, tax-exempt municipal yields made an enormous ascent during
the month of November. On 31 October, the 5-year maturity drew a 1.140% yield. As of
Friday, that same benchmark point stood at 1.580%, 44bps higher on the month.
Likewise, the 10-year maturity stood at 2.270% on Friday, up from 1.740% on 31
October, a 53bps jump.
Municipal-to-US Treasury (M/UST) Yield Ratios
The previous five trading days can be characterized as a period of catching-up on the
downside for municipal bonds. Both the US Treasury (UST) and tax-exempt municipal
bond markets got trounced last week, but with USTs outperforming high-grade
municipals at every maturity (Fig. 8). The 2-year M/UST ratio ended the week at
101.124%, markedly higher than the previous Friday's 97.508% (Fig. 10). Likewise, the
5-year measure rose by 7.089 ratios to 88.170%, up from 81.081%. The 10-year M/UST
closed at 96.678%, 6.066 ratios higher from 90.612%, and the 30-year quotient printed
As bond yields soared last week, the tax-exempt municipal market delivered dreadful
results. The S&P Municipal Bond Index returned an horrific -1.534% (Fig. 13), as the
Intermediate, Short Intermediate, and Short indices finished the week with performances
of -1.626%, -0.958%, and -0.439%, respectively. The S&P Municipal Bond High Yield
Index struggled over the past five trading days producing a total return of -2.065%.
Following suit with the broad benchmark, the California and New York indices closed
under water with performances of -1.851% and -1.472%, correspondingly. The Puerto
Rico Index closed Friday with a five-day return of -1.074%.
The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index's yield held steady for the second week in a row, printing a yield of 0.550% (Fig. 17).
Supply and demand
The upcoming holiday-shortened week should bring a paltry $1.599 billion in new municipal bond deals, which is an 85% decline from last week's $10.440 billion (Fig. 22) and the lowest figure thus far in 2016. The 12-week moving average stands at $8.839 billion and is the smallest record since the week of 10 October, when that figure was $8.339 billion.
Turning to demand, investors continued to be net sellers of municipal bond mutual funds for the second consecutive week. The Investment Company Institute registered a moderate but negative $132 million of net municipal bond fund outflows for the trailing five business days ending Wednesday, 16 November (Fig. 23). The most recent figure brought the 2016 year-to-date amount to a positive $52.713 billion.
The Municipal Securities Rulemaking Board (MSRB) reported total par value trades of $74.978 billion for the most recent five trading days ending Friday, more than double that of the preceding week's $33.232 billion (Fig. 24). Furthermore, 18 November marked the largest rolling 5-day volume since 3 October, when that print was $76.150 billion. Over the past six months, daily volume averaged $11.220 billion, with the maximum occurring on 29 September, at $18.324 billion. Trading activity over the upcoming Thanksgiving-abbreviated week should be rather muted. Additionally, investors should expect liquidity to begin to evaporate as the final weeks of 2016 approach.
Thomson Reuters Municipal Market Data (MMD) conducts a weekly survey of broker-dealer firms, sell-side traders, and buy-side portfolio managers. The survey gives dealers' and portfolio managers' 1-week and 1-2 month outlooks for the municipal market.
Friday's report showed that dealers eliminated any bullish responses for their 1-week outlook, taking that category to 0%, down from 37% two weeks ago; there was no survey conducted last week because of Veterans Day (Fig. 25). The neutral group fell to 50%, down from 63%, and the bearish group jumped to 50%, up from 0%. Dealers' 1-2 month outlook turned less sanguine, too. There were no respondents who were bullish, as opposed to 50% two weeks ago (Fig. 26). The neutral category jumped to 75%, up from 25%, and the bearish class remained unchanged at 25%.
What a difference a fortnight made. Two weeks ago, 20% of portfolio managers were bullish and 60% were neutral, with regard to their 1-week outlook (Fig. 27). Only 20% were bearish. As of this past Friday, 83% were bearish and 17% were neutral. No one had a1-week bullish view. More pronounced was the 1-2 month outlook; Friday's print showed portfolio managers were 100% bearish for that time horizon (Fig. 28). Only three weeks ago, 50% of portfolio managers were bullish for the 1-2 month range.
As of last week's close, traders were slightly more constructive on the municipal bond market, as 12% described their inventories as heavy, as opposed to two weeks ago when that number was 0% (Fig. 29). Moreover, 63% portrayed their positions as medium, up from 50% at the prior count, and only 25% reported light positions.