April Month in Review
April marked a generally strong month for the U.S. economy, as continued nationwide vaccination efforts resulted in a broader reopening for the consumer-driven services and manufacturing industries.Footnote1 Despite generally positive economic data and equity market strength, Treasuries rallied during the month on heightened international demand, solid auctions, and a pullback from the recent selloff. U.S. Treasury yields inside of the three-year tenor ended the month flat or down by one basis point (bp), while yields at the five-year tenor and beyond closed 8–14 bps lower than the previous month end.Footnote2
Municipal bond yields declined across the curve in April in tandem with Treasuries. The 10-year tenor of the AAA Municipal Market Data (MMD) curve closed the month at 0.99%, down 13 bps from March’s final tally.Footnote3 Despite rich AAA municipal valuations, demand for munis has remained robust, with municipal fund inflows on pace for a record year (+$41.5 billion year-to-date).Footnote4 Demand for munis is expected to persist as President Biden pushes for both an increase in capital gains taxes for the wealthiest Americans and higher corporate tax rates, the latter of which would likely drive demand from banks and insurance companies.
April brought $37.6 billion of total municipal debt to market, a 20% decrease from March’s total. By contrast, taxable municipal issuance increased, with the $11.3 billion brought to market in April, representing a 28% gain over the $8.8 billion issued in March.Footnote5*
- The Federal Open Market Committee (FOMC) left interest rates unchanged at its April meeting, reinforcing its commitment to support the U.S. economic recovery. Fed officials noted they will likely require further progress toward the central bank’s labor market and inflation goals – maximum employment and 2% symmetric inflation, respectively – before rates can be hiked and the Fed’s bond purchase program can be tapered back. Last month’s survey of Fed officials indicated that most do not expect a rate hike until 2023 at the earliest.Footnote6
- Municipal bonds experienced a strong month of performance in April in both the federally tax-exempt and taxable spaces. The Bloomberg Barclays Municipal Bond Index posted a 0.84% gain, the Bloomberg Barclays High Yield Municipal Bond Index returned 1.46%, and the Bloomberg Barclays Taxable Municipal Index advanced by 1.52% over the month. April’s performance brings year-to-date total returns for the three indices to 0.48%, 3.61%, and -2.01%, respectively.Footnote7
- Because U.S. municipal yields generally declined in greater magnitudes than U.S. Treasury bond yields of equal tenors in April, municipal taxable-equivalent spreads tightened across the curve. At month-end, spreads equated to nine bps at the one-year tenor (down slightly), -13 bps at the five-year tenor (down from -8 bps), three bps at the 10-year tenor (down from 15 bps), and 38 bps at the 30-year tenor (down from 54 bps).Footnote8*
Though secondary market trade activity was down in April relative to March, it still marked the second most active month of the year so far. Trades for the month totaled just under 668,000 (down from ~771,000 in March), with par traded amounting to $197 billion (down from $223 billion in March).Footnote9
Muni technicals in focus: Municipal market sees unrelenting demand
Investor sentiment was positive in April, bolstered by the continued domestic vaccination rollout, promising economic data, strong corporate earnings, accommodative monetary policy, and expansive fiscal policy. Equity and fixed income markets deviated from their usual inverse relationship and rallied in tandem for much of the month.Footnote10 With fixed income markets seeking signs of clear directionality and revived foreign appetite for Treasuries, the 10-year Treasury yield closed the month down 10 bps from last month-end.Footnote11 Municipal yields generally tracked Treasuries’ downward course in April, and the Bloomberg Barclays Municipal Bond Index, Bloomberg Barclays Municipal High Yield Index, and Bloomberg Barclays Municipal Taxable Index posted positive monthly returns of 0.84%, 1.46%, and 1.52%, respectively.Footnote12
April usually brings seasonal headwinds for the municipal market, as investors look to sell municipals to meet tax payments and elevated supply tends to outweigh reinvestment capital. However, President Biden’s proposed infrastructure plan and the American Families Plan, which call for higher corporate and capital gains tax rates, largely propelled heightened demand for municipals.Footnote13 Despite relatively expensive municipal valuations, retail investors piled ~$7.88 billion into municipal funds – continuing a trend that has led to the fastest year-to-date pace of municipal inflows on record.Footnote14 The robust demand absorbed the $33.65 billion in net supply over the month.Footnote15 Notably, taxable issuance, which comprised over a fifth of April’s total volume, would likely rise if discussion regarding the revival of a program reminiscent of Build America Bonds comes to fruition.Footnote16
April saw a continuation of last month’s encouraging credit trends, driven in large part by similar factors: federal support and an improving outlook on the virus and vaccination rates. We have seen the rating agencies turn more positive on large swaths of the municipal market as economic activity and travel begin to recover, illustrated by S&P revising its outlook to Stable on nearly 130 obligors spread across the transportation sectors (airports, mass transit, ports, and toll roads). Additionally, several high-profile rating actions suggest stabilization (S&P revised its outlook on the State of New Jersey to Stable from Negative) or material improvement (Moody’s upgraded the State of Connecticut for the first time since 2001, bringing its general obligation rating to Aa3). State budget conditions in general continue to turn more constructive, as evidenced by fiscal year 2022 budgets proposing 3 to 4% spending growth in most cases – a sharp reversal from FY21’s austerity measures.Footnote17
While the news remains largely positive for municipal credit, we still see reminders of how long it may take individual obligors to fully recover from the pandemic. In April, New York City released its FY22 budget proposal, which forecasts a significant drop in expected property tax collections. Likewise, San Francisco announced an expectation that property valuations will fall for one of the first times in more than two decades. The unprecedented amount of federal aid will help smooth out near term fiscal challenges for both cities (New York City alone is expecting nearly $6 billion of direct federal aid in its FY22 budget). However, some municipal obligors will still need to make tough fiscal choices in order to balance budgets beyond the coming year.
To learn more about investing in municipals at PIMCO, please visit pimco.com/munis