Municipal Monthly

Monthly Municipal Market Update, March 2021

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

Monthly Municipal Market Update, March 2021

March Month in Review

The U.S. stock market closed out the first quarter of 2021 by posting its second straight month of positive returns, with the S&P 500 index experiencing its strongest month since November. The sentiment surrounding the U.S. economy appears largely positive in light of continued federal aid, an accelerating COVID-19 vaccine distribution program, and the Federal Reserve’s optimism for economic recovery. President Biden also unveiled a $2.25 trillion U.S. infrastructure spending plan on the month’s final day. March’s events largely spurred investors to trade out of longer-term U.S. government bonds, driving U.S. Treasury yields up by 23–29 basis points (bps) at the 10-year tenor and beyond.

Municipal bonds experienced a relatively lively month. Following a rally in the first half of the month, munis saw a sharp two-day sell off, before rallying once again in the month’s penultimate week. Interestingly, while U.S. Treasuries yields ended the month up across the majority of the curve, AAA Municipal Market Data (MMD) yields closed March with single-digit declines at all tenors. The 10-year tenor of the AAA MMD curve closed the month at 1.12%, down two bps from the previous month end After four months of inflows, Lipper reported a weekly outflow of $605 million from municipal bond funds in the first week of March, although this was followed by four additional weeks of inflows. In March, $42.4 billion of total municipal debt came to market, representing a 21% increase over the previous month. However, taxable municipal issuance totaled just $8.8 billion, a 25% decline from the $11.8 billion brought to market in February.

  • The Federal Open Market Committee (FOMC) met in March, with Committee members voting to extend the Fed’s asset purchase program and keep short-term interest rates at their current near-zero level. While the Committee maintained its stance that rate hikes are unlikely through 2023, Fed policymakers did acknowledge improvements to GDP growth and unemployment estimates. Fed Chair Jerome Powell commented that he expects inflation will rise this year but likely not enough to modify the Fed’s current policy, which targets inflation above 2% for some time.
  • Tax-exempt municipal bonds posted positive returns in March. The Bloomberg Barclays Municipal Bond Index returned 0.62%, while the Bloomberg Barclays High Yield Municipal Bond Index gained 1.08%, bringing year-to-date total returns for the two indices to -0.35% and 2.11%, respectively. In sharp contrast, the Bloomberg Barclays Taxable Municipal Index returned -1.54% in March, dragging the year-to-date total return for the index down to -3.47%.
  • Because U.S. Treasury bond yields generally rose and U.S. municipal bond yields fell through March, municipal/Treasury ratios beyond the 1-year tenor closed the month at lower levels than February. At month-end, ratios equated to 150% at the one-year tenor (flat), 54% at the five-year tenor (down from 74%), 64% at the 10-year tenor (down from 79%), and 72% at the 30-year tenor (down from 82%).
  • March was the busiest month for municipals in the secondary market since April of last year. Trades for the month totaled just under 771,000 (up from ~649,000 in February), with par traded amounting to $223 billion (up from $192 billion in February).

Muni technicals in focus: Strong fundamentals anchor the municipal market

After moving in tandem with the broader fixed income market in February, municipals showed resilience in March, spurred by the $1.9 trillion federal stimulus bill, a corresponding improved municipal credit outlook, and the enhanced value of the municipal tax-exemption given the potential for higher taxes and rising rates. Following February’s negative returns, the Bloomberg Barclays Municipal Bond Index posted a 0.62% return in March and the Bloomberg Barclays Municipal High Yield Index returned 1.08%, outperforming the Bloomberg Barclays U.S. Aggregate Bond Index’s 0.10% return. Although the 10-year Treasury yield climbed ~30 bps over the month, the 10-year AAA municipal yield closed March down 2 bps at 1.12%. As a result, the 10-year municipal/Treasury ratio fell to ~64.25% by month-end.

Municipal technicals remained generally favorable in March. Following two months of relatively muted supply, March saw a pickup in volume with $41.60 billion in net issuance. On the demand front, retail investors withdrew $605 million from municipal funds during the first week of the month, reversing 16 consecutive weeks of inflows. However, municipal funds experienced inflows in the four weeks that followed, as retail investors poured an aggregate ~$2.52 billion into municipal funds over the month.

As mentioned earlier, March brought the next round of federal COVID relief legislation, with the bill ultimately devoting $350 billion of direct aid for state and local governments. State governments alone are slated to receive $195 billion – equivalent to nearly one quarter of states’ expected FY21 general fund revenues. In response, rating agencies upgraded nearly all U.S. public finance sector outlooks to stable from negative. Notably, the promise of federal aid (along with strong revenue performance) resulted in two of three rating agencies revising beleaguered Illinois’ outlook to stable from negative, reducing the near-term risk of the first U.S. state getting downgraded below investment grade.

We believe it is too early to discern how state and local governments will ultimately allocate federal aid. Several states are pushing back against U.S. Treasury guidance that aid may not be used to offset tax cuts, which underscores uncertainty about how federal funds will be utilized. However, we believe federal aid will prove tremendously helpful in closing budget gaps and reducing what were likely to be significant FY21 and FY22 austerity measures. After facing budget cuts, sectors such as public higher education and K-12 education should see stable or even improved funding environments. Given ongoing economic challenges, the bill may not be a cure-all, but we believe additional federal aid will significantly chip away at projected deficits.

Monthly Municipal Market Update, March 2021

Monthly Municipal Market Update, March 2021

Monthly Municipal Market Update, March 2021

To learn more about investing in municipals at PIMCO, please visit pimco.com/munis



[1] Will Horner and Paul Vigna, “S&P 500 Rises but Just Misses New Record,” Wall Street Journal, 31 Mar 2021

[2] Nancy Cook and Jennifer Epstein, “Biden Plans $2.25 Trillion Spending, Corporate Tax Hikes,” Bloomberg, 30 Mar 2021

[3] Thomson Reuters TM3 MMD Interactive Data, 31 Mar 2021

[4] Thomson Reuters TM3 MMD Interactive Data, 31 Mar 2021

[5] Refinitiv Lipper, 31 Mar 2021. *Data is inclusive of weekly reporting funds and does not include monthly reporting funds.

[6] The Bond Buyer: Primary Market Statistics – A Decade of Bond Finance, 31 Mar 2021; Bloomberg, 1 Apr 2021

[7] Jeff Cox, “Fed sees stronger economy and higher inflation, but no rate hikes,” Wall Street Journal, 17 Mar 2021

[8] Bloomberg Barclays, 31 Mar 2021

[9] Thomson Reuters TM3 MMD Interactive Data, 31 Mar 2021

[10] SIFMA: US Municipal Bond Statistics, Trading Volume, 1 Apr 2021

[11] Bloomberg Barclays, 31 Mar 2021

[12] Thomson Reuters TM3 MMD Interactive Data, 31 Mar 2021

[13] Ibid

[14] The Bond Buyer, “Bond Sales (Latest Month)”, 31 Mar 2021

[15] Refinitiv Lipper, 31 Mar 2021. *Data is inclusive of weekly reporting funds and does not include monthly reporting funds.

[16] Ibid

[17] Per NASBO’s Fall 2020 Fiscal Survey of the States, state governments in total estimated $839 billion in total FY21 General Fund revenues.

[18] In March 2021, Moody’s revised their sector outlooks to stable for higher education, airports, states, and local governments.

[19] Moody’s and S&P both revised their outlooks to Stable, while Fitch retains their Negative outlook.

[20] Rappeport, Alan, “A Last-Minute Add to Stimulus Bill Could Restrict State Tax Cuts”, The New York Times, 12 Mar 2021

Related Funds

Disclosures

Past performance is not a guarantee or a reliable indicator of future results.

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. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.

References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included.

The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively

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 appropriate 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 on 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 does 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.

Bloomberg Barclays Municipal Bond Index consists of a broad selection of investment-grade general obligation and revenue bonds of maturities ranging from one year to 30 years. It is an unmanaged index representative of the tax-exempt bond market. The index is made up of all investment grade municipal bonds issued after 12/31/90 having a remaining maturity of at least one year. The Bloomberg Barclays High Yield Municipal Bond Index measures the non-investment grade and non-rated U.S. tax-exempt bond market. It is an unmanaged index made up of dollar-denominated, fixed-rate municipal securities that are rated Ba1/BB+/BB+ or below or non-rated and that meet specified maturity, liquidity, and quality requirements. The Barclays Taxable Municipal Index represents a rules-based, market-value weighted index engineered for the long-term taxable bond market. For inclusion in the Index, bonds must be rated investment grade quality or better, have at least one year to maturity, have a coupon that is fixed rate, have an outstanding par value of at least $7 million, and be issued as part of a transaction of at least $75 million. The Intermediate Municipal subsector groups together securities with an average maturity between one to 10 years. The Barclays 1-10 Year Municipal Bond Index is an unmanaged index considered to be generally representative of investment-grade municipal issues having remaining maturities from 1-10 years and a national scope. It is not possible to invest directly in an unmanaged index.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for information purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. 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. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2021, PIMCO.

CMR2021-0408-1596663

Monthly Municipal Market Update, April 2021
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