Municipal Market Overview
November muni performance (at 0.17%) may not look remarkable on the surface, but given the headwinds, it was an impressive feat—allowing the market to maintain its perfectly positive year. Specifically, the fourth quarter is often marked by greater volatility and an increase in municipal bond issuance. This year has been no different, except that the demand for high-quality fixed income assets has been voracious, and that served to offset the larger supply and mute volatility.
Muni issuance for the month came in at $28.3 billion, bringing year-to-date (YTD) supply to $295 billion. Meanwhile, muni bond mutual funds attracted $3 billion in new assets in November, bringing YTD inflows to $23.8 billion. Fund flows have been positive for 19 consecutive weeks. November performance also benefited from an investor flight to safety, which continued to push yields lower (and prices higher). The rate drop was more pronounced in the Treasury market. That has driven muni-to-Treasury ratios above 100% for 30-year maturities, making municipal bonds an attractive income option for investors and drawing the attention of crossover buyers.
Fundamentals remain solid as well, though the recent drop in oil prices has us cautious on states heavily reliant on energy production. Still, defaults are on pace to be at their lowest in three years, and with the midterm elections resulting in a unified Congress, any chance of tax reform appears far off. The market is more focused on the high bond measure approval rate, a potential sign that the aversion to debt is fading.