Municipal Fixed Income Weekly - November 18, 2016 (PDF)
Yield curve
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
101.124%
Market performance
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.
Trading Activity
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.
Market Sentiment
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.
