Municipal Monthly

Monthly Municipal Market Update, March 2020

A brief monthly update on what's happening in the municipal bond market.

IMPORTANT NOTICE: Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real-time market developments. All opinions are subject to change without notice.

Figure 1 is a table displaying yield and spread data as of 31 March 2020 for municipal bond markets and U.S. Treasury markets in maturities of 2, 5, 10, and 30 years. It also displays year-to-date data on municipal market issuance, fund flows, and index returns. Key takeaways are discussed in text below this table

Month in review

Against the backdrop of the COVID-19 pandemic, the AAA Municipal Market Data (MMD) yield curve ended the highly volatile month of March with yields up 33–47 basis points (bps) relative to February month-end. Coming less than two weeks after AAA MMD yields reached all-time lows, with the 10-year tenor hitting 0.78% on 9 March, a significant sell-off caused the 10-year AAA MMD yield to reach its highest level since 2013 at 2.79%.1 March total municipal bond issuance of $17.0 billion — approximately $3.0 billion of which was attributable to taxable municipal debt — represented a dramatic decline from February’s $40.6 billion and was the lowest monthly issuance figure since February 2014.2

  • The Federal Reserve cut short-term interest rates twice in March, initially by 50 bps at an emergency policy meeting on 3 March, and then by an additional 100 bps on 15 March. As part of its multi-faceted approach to combat the growing threat of a U.S. and global recession, the Fed also announced the reintroduction of quantitative easing measures, pledging to purchase at least $700 billion in Treasury and mortgage-backed securities.3
  • Municipal bond indices were down on the month, with high yield municipals taking the biggest hit, following the mid-March municipal bond sell-off. The Bloomberg Barclays Municipal Bond Index returned -3.63% and the Bloomberg Barclays High Yield Municipal Bond Index returned -11.00%.4
  • As Treasury yields declined and muni yields increased through March, muni/Treasury ratios spiked across the curve. The one-year ratio ended the month at 700% (up from 73% at the end of February), the two-year ratio at 482% (up from 83%), the five-year ratio at 295% (up from 80%), and the 10-year ratio at 196% (up from 82%).5
  • Muni/Treasury taxable-equivalent spreads* also soared in March. At month-end, spreads equated to 162 bps at the one-year tenor, 157 bps at the two-year tenor, 147 bps at the five-year tenor, and 157 bps at the 10-year tenor.6
  • March secondary market trading reached the highest levels since 2008, as the month’s 1,104,000 total trades and $515 billion in par traded marked the largest such figures since October 2008 and March 2008, respectively.7

Muni technicals in focus: A historic month due to broader market dislocation

The global spread of COVID-19 and an energy conflict, which sent crude oil prices tumbling the most since the Gulf War, fueled recession fears and shook global financial markets in March. The Dow plunged by over 37% from its peak in February, abruptly ending the equity market’s 11-year bull run.8 In nine trading days spanning from 9 March to 19 March, the Bloomberg Barclays U.S. Aggregate Bond Index fell by 6.3%.9 Even the world’s most liquid markets were challenged, as the gap between the three-month AA Financial Commercial Paper Index and Overnight Indexed Swap widened to over 1%.10

Following five-straight months of positive returns for the municipal market, the Bloomberg Barclays Municipal Bond Index fell in March, returning -3.63%.11 Further, Treasuries and municipals briefly diverged this month, as the 10-year Treasury yield plummeted to a new low of 0.51% on 9 March, while the 10-year AAA municipal yield surged to 2.79% on 20 March.12 As such, in just 10 trading days, muni yields relative to Treasuries moved to their highest on record, with the 10-year muni/Treasury ratio briefly peaking at nearly 370% during March.13

With dealers finding it difficult to hedge with Treasuries and crossover investors slow to enter the market, new issuance was largely shelved. A roughly $24.5 billion exodus from municipal bond funds — including the largest weekly outflow on record of $13.7 billion — served to sharply reverse the previous 60 consecutive weeks of net inflows.14 As funds unwound leveraged strategies and liquidated to meet redemptions, supply outstripped retail demand and bid-ask spreads widened considerably. Despite elevated bid-ask spreads, daily volume traded jumped to approximately $30 billion at mid-month, and daily bids-wanted posted on Bloomberg surpassed 11,840, the highest on record.15

Given this backdrop of challenged liquidity conditions, the Fed expanded its emergency lending facilities to include short-term municipal bonds and variable-rate muni debt held in money market funds.16 The Coronavirus Aid, Relief, and Economic Security (CARES) Act authorized the Fed to purchase munis beyond the six-month maturity limit noted in the Federal Reserve Act.17 Monetary policy action coupled with the fiscal stimulus response has provided some relief to municipal markets, and market technicals began to stabilize toward month-end.

We anticipate the COVID-19 pandemic and resultant widespread shutdowns to have far-reaching credit consequences, emphasizing the need for diligent credit selection to navigate potentially increased default risk centered around specific segments of the high yield market. Although we do not expect high quality municipal obligors to see higher default risks, we believe they will face challenges in the coming months. Those obligors that are dependent on economically sensitive revenues — such as income or sales taxes — will experience declines in collections, and we expect frequent negative headlines focused on high-profile obligors’ budget conditions. We believe high quality municipal obligors will respond with budget adjustments to close emerging budget gaps, and that credit risk will remain modest for the vast majority of the high grade municipal market. Against the current backdrop, our team’s ongoing credit surveillance and limited downside risk tolerance continue to be key facets of our highly disciplined portfolio management process.

During March, the after-tax spread on 10-year municipal bonds briefly spiked above 2.3% before ending the month below 1.0%, still above its five-year average of around 0.6%. The corresponding spread on 2-year muni bonds also rose above average

The month-over-month change in municipal bond yields varied by bond tenor, ranging from 32 basis points for 1- and 2-year tenors up to 47 basis points for 20- through 30-year tenors

Market data as detailed in tables, as of 31 March 2020

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1   Thomson Reuters TM3 MMD Interactive Data, 31 March 2020
2   The Bond Buyer: Primary Market Statistics – A Decade of Bond Finance, 31 March 2020
3   David Goldman, “Federal Reserve cuts rates to zero to support the economy during the coronavirus pandemic,” CNN Business, 16 March 2020; Nick Timiraos, Harriet Torry and Josh Mitchell, “Fed Takes Emergency Steps as Virus Pushes Economy Toward Recession,” The Wall Street Journal, 15 March 2020
4   Bloomberg Barclays, 31 March 2020
5   Thomson Reuters TM3 MMD Interactive Data, 31 March 2020
6   Thomson Reuters TM3 MMD Interactive Data, 31 March 2020
7   SIFMA: US Municipal Trading, 9 March 2020; The Bond Buyer: Secondary Market Data, 31 March 2020
8   Bloomberg, 31 March 2020
9   Ibid
10  Ibid
11  Bloomberg Barclays Indices, 31 March 2020
12  Thomson Reuters TM3 MMD Interactive Data, 31 March 2020
13  Ibid
14  Refinitiv Lipper, 31 March 2020
15  Bloomberg, 31 March 2020
16  Nick Timiraos and Heather Gillers, “Federal Reserve Considering Additional Support for State, Local Government Finance,” The Wall Street Journal, 27 March 2020
17  Coronavirus Aid, Relief, and Economic Security (CARES) Act, 27 March 2020


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A word about risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax; a strategy concentrating in a single or limited number of states is subject to greater risk of adverse economic conditions and regulatory changes.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

Forecasts, estimates and certain information contained herein are based pon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

PIMCO and Gurtin do not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. It is not possible to invest directly in an unmanaged index. This market update was provided by Gurtin Municipal Bond Management, a PIMCO company (“Gurtin”). This material contains the current opinions of Gurtin and PIMCO. The commentary provided herein represents Gurtin’s assessment of the market environment at a specific time and the opinions and information stated and relied upon herein may become outdated, change, or otherwise be superseded at any time without notice. Certain information contained in this report is based upon third party sources, which Gurtin and PIMCO believe to be reliable, but are not guaranteed for accuracy or completeness. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2020, PIMCO.

Monthly Municipal Market Update, May 2021
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