Munis may be positioned for ‘nice run’

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Municipal bonds outperformed other asset classes in 2018 and it looks like the trend will continue into the new year.

Municipal bond activity is light as the market is mostly in vacation mode with no major bond sales scheduled until 2019. Nervous investors continued to flock to the safety of bonds amid political developments in Washington and worries of decelerating global growth.

“The performance of bonds versus other asset classes, it was a strong year for munis,” said one New York trader. “I think bonds are better positioned now for a nice run, then they were a year ago.”

Weekly ICI report
The Investment Company Institute estimated outflows from long-term mutual funds were $56.21 billion for the week ended Dec. 19, the ICI reported Wednesday.

“Even as markets continue through a period of volatility, fund shareholders remain committed to saving for the long-term,” said Sean Collins, ICI’s chief economist. “This week’s outflow from mutual funds, represents only 0.36 percent of long-term mutual fund assets as of Oct. 31, and were offset in part by inflows of $25.27 billion into exchange-traded funds in the same week. This is consistent with the steady investment behavior we have witnessed from fund shareholders for decades and reinforces some investors view periods of volatility as a buying opportunity.”

ICI estimated bond funds saw outflows of $19.60 billion for the week (0.48 percent of Oct. 31 assets), compared with estimated outflows of $14.57 billion during the previous week. Taxable bond funds saw estimated outflows of $18.47 billion (0.54 percent) and municipal bond funds had estimated outflows of $1.14 billion (0.17 percent).

Secondary market
Municipal bonds were mixed on Wednesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell no more than two basis points in the one- to three-year, eight- to nine- year and 22- to 30-year maturities. The remaining 16 maturities were either unchanged or higher by no more than one basis point.

High-grade munis were also mixed, with yields calculated on MBIS' AAA scale dropping as much as three basis points in the one- to four-year, eight-to ten-year and the 26-year to 30-year maturities. Out of the 18 remaining maturities, 10 were flat and the rest saw yields increase by no more than one basis point.

Municipals were steady on Municipal Market Data’s AAA benchmark scale, which showed the yield on both the 10-year muni general obligation and the 30-year muni maturity remaining unchanged.

On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 82.2% while the 30-year muni-to-Treasury ratio stood at 99.4%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.

Previous session's activity
The Municipal Securities Rulemaking Board reported 13,858 trades on Monday on volume of $3.719 billion.

California, New York and Texas were the municipalities with the most trades, with the Golden State taking 15.941% of the market, the Empire State taking 11.686% and the Lone Star State taking 10.863%.

Primary market
There are no scheduled bond sales. Issuance will start up again in the new year.

Treasury auctions floating rate note
The Treasury Department Wednesday auctioned $18 billion of one-year 10-month floating rate notes with a high discount margin of 0.150%, at a 0.045% spread, a price of 99.808012.

The bid-to-cover ratio was 2.71.

Tenders at the high margin were allotted 52.82%.

The median discount margin was 0.120%. The low discount margin was 0.080%.

The index determination date is Dec. 24 and the index determination rate is 2.415%.

Treasury also auctioned $41 billion of five-year notes, with a 2 5/8% coupon, a 2.652% high yield, a price of 99.874345.

The bid-to-cover ratio was 2.09.

Tenders at the high yield were allotted 86.01%. All competitive tenders at lower yields were accepted in full.

The median yield was 2.599%. The low yield was 2.400%.

Gary E. Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Ziad Saba at 212-803-6079 for more information.

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