Municipal Update 4th Quarter 2017
4th Quarter 2017 Municipal Market Performance and Highlights
  • Municipals outperform in 4Q2017: Municipal market returns were broadly positive in the fourth quarter of 2017. The Bloomberg Barclays Municipal Bond Index returned 0.75% during the fourth quarter of 2017 compared to 1.06% in the third quarter of 2017, and outperformed the Bloomberg Barclays U.S. Treasury Bond Index by 70 basis points (bps), which generated a return of 0.05% in the fourth quarter of 2017. For all of 2017, the Bloomberg Barclays Municipal Bond Index had a total return of 5.45%, compared to the Bloomberg Barclays U.S. Treasury Bond Index return of 2.31%.
  • Tax Reform and Fed Activity: Healthy U.S. economic fundamentals, an unsettling geopolitical landscape and the continuance of global quantitative easing (QE) programs between the European Central Bank (ECB) and Bank of Japan (BOJ) were contributing factors in the global rates markets and U.S. Treasury bond prices in the fourth quarter. Additional influences were the passage of tax reform and U.S. Federal Reserve activity, including the continuation of rate normalization to the upside and the beginning of balance sheet downsizing. At December 31, 2017, the 10-year U.S. Treasury yield stood at approximately 2.40%, representing a 7 basis point increase from 2.33% at September 30, 2017.
  • Municipal Issuance Explodes Higher as Tax Reform Proposals Restrict Issuance: In the fourth quarter of 2017, primary market municipal bond issuance increased by a monstrous 39.8% year-over-year. New issue supply was greatly aided by December's record supply of over $64 billion (versus the average over the past two Decembers of $22 billion), as issuers rushed to market in the face of tax reform eliminating advance refunding of municipal bonds on a tax-exempt basis. While private activity bond's (PAB) tax exemption was left unchanged, the threat of repeal ushered in a wave of issuance by hospitals, colleges, and universities, among other industries. New issue supply totaled $439 billion for the year, only 2% lower than a year ago when the market had record supply ($446 billion in 2016).
  • Retail Demand Stays Consistently Positive: Retail demand for the fourth quarter totaled $2.1 billion versus $8.8 billion for the third quarter of 2017. Total net inflows for 2017 were $24.1 billion, 5.6% less than 2016's total net inflows of $25.5 billion. Municipal fund flows were positive during each of the first eleven months of 2017, ranging from a positive $873 million to $3.8 billion, and turned negative in December with outflows of $1.3 billion.
  • Credit Trends were Positive, Despite High-Profile Defaults: As a whole, municipal credit quality trends remained favorable in 2017. Through December 31, 2017, using Municipal Market Analytics (MMA) data, first-time municipal defaulters totaled just 43 borrowers compared to 2016 with 69 borrowers. According to MMA data, 2017 default numbers indicate a record low number of defaulting borrowers going back to when the data was first available in 2009. Moody's credit rating upgrade vs. downgrade ratios also suggest favorable credit trends, with the number of credit rating upgrades exceeding downgrades in two of the first three quarters of 2017, including the quarter ended September 30, 2017.
  • Tighter Credit Spreads: During the fourth quarter of 2017, credit spreads continued to tighten for both "AAA" and "BBB" rated municipal securities in the 10 year through 30 year part of the curve. We believe "BBB" credit spreads for new bond issues are tighter than their five-year historical average.

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Posted on Tuesday, February 13, 2018 @ 8:29 AM

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.