The municipal market outperformed both Treasuries and corporate bonds in December, propelled once again by favorable supply/demand dynamics. The yield curve flattened significantly, with the short end rising as the Fed lifted its target short-term interest rate for the first time since 2006 and the long end holding steady as global growth disappointed and oil prices approached a six-year low, muting inflation expectations.
Issuance was unseasonably low for the fourth straight month, at $22.2 billion, down 41% year over year and 29% below the 10-year average. On an annual basis, supply was up vs. 2014 and the historical averages, though it should be noted that 55% of new issues were refundings. Meanwhile, demand continued strong, with $5.9 billion in inflows recorded in December. This capped 13 weeks of positive flows and brought the 2015 total to $16.3 billion. We expect this technical tailwind to hold in January and February, which should allow the traditional retail buyer to absorb supply and carry the market with less reliance on non-traditional and crossover (taxable) buyers.