With issuance for 2019 pretty much done, investors and money managers look forward to a new year — and there is optimism that drivers of muni performance will carry over, making 2020 a fruitful year as well.
The market has seen its share of slow starts to years, especially recently, but Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, thinks that it will be different in 2020.
“We have had a little bit of a slow start to the year in recent years, but I don’t think that will be the case in 2020,” he said. “There has been some upward pressure on rates that will make issuers come to market in droves in the early part of the year, as the Fed made it clear they will not move rates up anytime soon.”
2019 was a remarkable year for munis in many ways — super strong demand for the product illustrated by 50 straight weeks of inflows, most of which exceed $1 billion; The market breached the $400 billion mark for the year; the asset class will finished the year returning in excess of 5% — making it one of the best places to put your money.
“As far as the inflows go, they were unbelievable this year and I don’t know if we will ever see something like that again,” Heckman said. “I don’t see a repeat performance of the inflows happening in 2020.”
One issue that has been a thorn for municipalities that could become more of an issue is the pension obligation debt problem.
“Our market is still keeping its head in the sand when it comes to the pension obligation issue,” he said. “Employees today are able to ring out better compensations, and sometimes, promises made can be promises not kept.”
Another issue he will be keeping his eye on is the credit problem “workaround” — with the most prime example being the city of Chicago’s new credit, the Sales Tax Securitization Corp., which had top-tier ratings from Fitch and Kroll, while the Windy City’s regular credit has been sinking and is nowhere close to a AAA rating.
“Almost anything sold this year, despite the name or the credit, makes you wonder how some of those issuers would fair in a non-favorable market environment for issuers,” Heckman said.
Lipper reports muni bond fund inflows
For 50 straight weeks, investors have poured cash into municipal bond funds, according to data released by Refinitiv Lipper on Thursday.
Tax-exempt mutual funds that report weekly received $1.557 billion of inflows in the week ended Dec. 18 after inflows of $1.558 billion in the previous week.
Exchange-traded muni funds reported inflows of $136.296 million after inflows of $159.285 million in the previous week. Ex-ETFs, muni funds saw inflows of $1.421 billion after inflows of $1.399 billion in the previous week.
The four-week moving average remained positive at $1.521 million, after being in the green at $1.625 billion in the previous week.
Long-term muni bond funds had inflows of $1.181 billion in the latest week after inflows of $1.052 billion in the previous week. Intermediate-term funds had inflows of $315.476 million after inflows of $296.005 million in the prior week.
National funds had inflows of $1.342 billion after inflows of $1.371 billion in the previous week. High-yield muni funds reported inflows of $421.442 million in the latest week, after inflows of $453.630 million the previous week.
Bullard's happy where rates are
One of the most prominent voices on the Federal Open Market Committee calling for lower rates, Federal Reserve Bank of St. Louis President James Bullard told the Wall Street Journal he’s “penciled in no rate increases for 2020.”
Bullard, who was an FOMC voter in 2019, dissented twice this year: the first time in favor of a 25 basis point rate cut when the panel held rates in June, and in September when he preferred a 50-basis-point reduction in the fed funds rate, rather than the 25 basis point cut the majority agreed to.
The current 1.50% and 1.75% target is “appropriate in this environment,” he said. “We made a fairly big adjustment to policy during 2019. Now, we should wait and see what the effects are in 2020 and see how the data come in, in the coming year.”
Inflation should remain tame in his opinion, and businesses “are adjusting to the uncertainty” that occurred this year. “These corporate boards are not sitting on their hands and waiting for the world to come to them. They’re developing strategies to make money even in an environment where global trade relationships are more uncertain than they used to be,” Bullard told the paper.
The Fed’s three rate cuts eased concerns about an inverted yield curve, since the curve has been righted. “We can take a positive signal from the fact that the yield curve has returned to a more normal upward sloping shape.”
Secondary market
Munis were mixed on the MBIS benchmark scale, with yields increasing by a basis point in the 10-year maturity and decreasing by less than a basis point in the 30-year. High-grades were weaker, with yields on MBIS AAA scale rising by no more than one basis point in the 10-year and by less than one basis point in the 30-year maturity.
On Refinitiv Municipal Market Data’s AAA benchmark scale, the yields were unchanged on both the 10- and 30-year maturities at 1.45% and 2.09%, respectively.
The 10-year muni-to-Treasury ratio was calculated at 75.6% while the 30-year muni-to-Treasury ratio stood at 89.0%, according to MMD.
Treasuries were mixed as stocks stayed up, continuing a weeklong rally.
The Dow Jones Industrial Average was up about 0.41% as the S&P 500 Index rose 0.57% while the Nasdaq gained 0.41%.
The Treasury three-month was yielding 1.546%, the two-year was yielding 1.632%, the five-year was yielding 1.730%, the 10-year was yielding 1.916% and the 30-year was yielding 2.346%.
Previous session's activity
The MSRB reported 37,154 trades Thursday on volume of $17.350 billion. The 30-day average trade summary showed on a par amount basis of $12.02 billion that customers bought $6.48 billion, customers sold $3.45 billion and interdealer trades totaled $2.09 billion.
New York, California and Texas were most traded, with the Empire State taking 15.833% of the market, the Golden State taking 14.09% and the Lone Star State taking 10.32%.
The most actively traded security was the Dormitory Authority of the State of New York's taxable revenue bonds, 3.19s of 2043, which traded 22 times on volume of $57.75 million.
Primary market
There are no deals on the calendar until the week of January 6.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
