A positive return in December allowed municipal bonds to end the year in positive territory. Investors turned their attention to the asset class after the severe correction in November reset valuations and sent muni-to-Treasury ratios above 105%. Both traditional and non-traditional (taxable) buyers eagerly bought munis in early December.
New issuance of $18.9 billion was the lowest December figure since 2000. But 2016 was record-setting with $444 billion in gross issuance, much of it pulled forward in the fall months ahead of the election and Fed rate hike. Demand remained challenged, illustrated by outflows of $15.4 billion in December.
While still cautious, we would view any weakness as a potential buying opportunity.
After 43 weeks of inflows totaling $53 billion, the year ended with nine weeks of outflows that removed $26 billion from the asset class. The recent trend could continue in the near term as tax reform uncertainties hang over the market. Still, we remain constructive long term given munis’ ability to act as a portfolio diversifier and generate tax-free income.
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