Municipal Market Overview
February brought increased volatility across nearly all fixed income assets. The key culprits: Uneven U.S. economic data and widening central bank divergence, with international rate cuts coming at the same time the Fed lays the groundwork for normalizing U.S. rates. Munis modestly underperformed Treasuries of comparable maturity, due largely to a supply/demand dynamic that was less favorable than that enjoyed during the prior 13 months of positive muni performance.
Issuance in February was a robust $29.5 billion, well above market expectations and 22% higher than the 10-year trend. Year-to-date (YTD) issuance is 33% above the five-year average and 23% above the 10-year average. Notably, the issuance was predominantly refundings (about 60%), as new-money supply has yet to surface in a meaningful way. Demand remains robust, at nearly $3 billion for the month, and concentrated in long-term and intermediate funds. Flows into high yield munis have become more volatile, though high yield remains an attractive option in the persistent low-rate environment. While the underlying fundamentals augur well, the market is not without its headlines. Burdensome pension liabilities and need for reform continue to hamper states such as Illinois, New Jersey and Connecticut. The market is already demanding higher yields for these states’ debt. Conversely, California continues to impress and most recently was upgraded by Fitch.