Municipal Market Overview
The strong momentum of 2014 carried into January, helping to set a solid month for municipals. Performance of high-quality fixed income assets continues to be driven by falling interest rates, global economic uncertainty, easy monetary policies (and comparatively low rates) overseas, weak inflation expectations and an investor need for income. Evidence of the last point came in investors' continued preference for longer-duration and lower-rated munis offering relatively higher yields.
Issuance was a robust $27 billion, 39% higher than last January and exceeding the five- and 10-year averages, which are closer to $22 billion. Refunding activity drove much of the uptick in issuance, as low rates and a flattening curve prompted issuers to refinance their debt. While a month does not make a trend, we are watching the pattern in advanced refundings closely. Should it continue, it could have the potential to disrupt the favorable supply/demand dynamic that has been an important performance tailwind through some four years.
On the month, demand for munis (and the attractive tax-exempt income they offer) held firm. Flows into municipal bond mutual funds totaled $4.6 billion, representing one of the strongest Januarys on record.