Trending
Written by: Steve Majoris | Advisor Asset Management
Municipal (muni) and fixed income markets alike have been having a rough start to the year. Renewed fears of sticky inflation and waning expectations for rate cuts on the horizon are creating plenty of quagmires for investors. In the current environment, you don’t see a 60bps (basis point) move higher in the 10-year Treasury without casualties and holders of long duration are probably the ones that have been feeling the most pain. Although it was somewhat of an “uneventful” first quarter (Q1) for muni investors, especially when it comes to March and the 0.00% return for the month, the broad market was off -0.39% quarter-to-date and unfortunately, the downside momentum has picked up in April. Through the first half of the month broad municipals are off -1.04% while the longer segment of the market, is in the red by over 150bps. Although April is usually a negative month for muni fund flows and performance alike, this April both broad interest rate volatility and an uptick in new issuance over the past month are certainly playing their part as well.
As of the 2nd week of April, year-to-date new issuance totaled $118 billion which is up over 20% compared to the same time last year. We’ve also seen an increase in “uber” size deals, with seven issues of over $1 billion coming to market in the past month alone. California, Washington State, New York City, and the Metropolitan Transportation Authority (of New York City) have all brought recent deals of $1 billion or larger. According to Bloomberg, the 30-Day Visible Supply was as high as $16 billion earlier this month, the highest since October and up sharply from the year-to-date low of $5 billion back in January. Net supply has also been an important number to watch. For most of the year, net supply has been in negative territory, meaning new issuance hasn’t been enough to cover maturities and interest income likely looking to be put back to work in the market. With all the deals coming to market, net supply was as high as it’s been in a while, +$4.1 billion on April 9, but we are now back to negative territory: -$9 billion as of April 17th. JP Morgan Research is forecasting that total issuance for the month of April will be $29 billion, which is down from last April’s total of $34 billion.
Given we are past the latest surge in new issuance and net supply numbers are back in negative territory, perhaps the script might flip again back to a lower supply environment with buyers and demand leading the way. A negative April isn’t all too rare for the muni market but the following month tends to provide some relief. May — typically a strong month for municipals — has been in the black seven out of the last eight years; 2023 was the only exception going all the way back to 2016. Over that period, the average monthly return for May was 1.06% and in 2023, May was followed by positive returns in June and July of +1.0% and +0.40% respectively. Historically, May through July is usually a good stretch for municipals. Going back to 2018, both June and July were positive almost across the board with June 2022 being the ONLY exception. Heading into the last full month of spring with the summer months ahead, one might make the argument that recent weakness makes an attractive entry point for municipal monies to be put to work.
With broad municipals off over 100bps year-to-date, this is certainly not the start to the year most had hoped for but compared to taxable counterparts they have held up relatively well. Losses seen so far are roughly half the losses absorbed in the U.S. Treasury and U.S. Investment Grade Corporate markets over the same time. In addition, municipal yields have moved broadly higher over the course of the year and now sit roughly 50bps higher compared to January. Investors have been “fearful” as of late with over $1 billion in outflows from exchange-traded funds (ETFs) and mutual funds over the past week. According to JP Morgan daily fund flows, the majority has come from longer-term ETFs, which could reflect building sentiment that inflation could remain “sticky” and rates likely “higher for longer,” but it is likely only a matter of time before compelling yields bring buyers back. With seasonality expected to drive demand in coming months, others pulling money and being “fearful” suggests one of Warren Buffett’s more famous quotes, “Be fearful when others are greedy, and greedy when others are fearful.” April showers could bring May flowers.
Related: The Case for Canadian Equities