Municipal Update 2nd Quarter 2018
First Half of 2018: Municipal Market Performance and Highlights
  • Municipals outperform Treasuries in first half of 2018: Municipal market returns were relatively flat in first half of 2018. The Barclays Municipal Bond Index (BMBI) returned -0.25% during first half of 2018 and outperformed the Barclays Treasury Bond Index by 83 basis points (bps). For the trailing twelve months ended June 30, 2018, the BMBI had a total return of 1.56%, compared to the Barclay's U.S. Treasury Index return of -0.65%.
  • Rates and Fed Activity: Healthy U.S. economic statistics including payroll and wage growth, increasing inflation statistics, and U.S. Federal Reserve activity, including two FOMC rate hikes and the beginning of balance sheet downsizing, weighed on treasury prices in the first half of 2018. At June 29, 2018, the 10-year U.S. Treasury yield stood at approximately 2.86%, a 45 basis point increase from the start of the year. 
  • Overall Municipal Issuance Declines: In the first half of 2018, total municipal issuance declined by 21.8% led by a decline in advance refunding activity. The ability for municipal borrowers to pursue advance refunding of municipal bonds on a tax-exempt basis was a casualty of the Tax Cuts & Jobs Act. YoY, refunding issuance has declined 53%.
  • Despite Higher Rates, Retail Demand Remains Positive: Retail demand for the first half of 2018 totaled $13.6 billion of inflows, nearly identical to the $13.8 billion for the six months prior. Since the beginning of 2017, the municipal market has only seen three months of net outflows.
  • Credit Trends Positive: Municipal credit quality trends remained favorable in the first half of 2018. Through June 30, 2018, using MMA data, first-time municipal defaulters totaled just 12 borrowers compared to 22 and 29 in 2017 and 2016, respectively. Moody's credit rating upgrade vs. downgrade ratios also suggest favorable credit trends, with the number of credit rating upgrades exceeding downgrades in each of the last three quarters and six of the prior seven (for the quarter ended March 31, 2018).
  • Tighter Credit Spreads: During the first half of 2018, credit spreads compressed significantly for high yield municipals. Regarding investment grade rated municipals, A and BBB rated bond spreads declined modestly. See figures 1 and 3 below.
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Posted on Tuesday, August 7, 2018 @ 2:31 PM

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.