Municipal Monthly

Monthly Municipal Market Update, October 2020

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

Figure 1: Market snapshot

Month in Review

  • High yield municipal bonds outperformed investment grade munis in October, although both segments are in positive territory for the year.
  • October saw the highest monthly municipal issuance since 2017, as issuers rushed to bring deals to market prior to the election.
  • Despite the elevated supply, robust investor demand kept municipal yields contained in October.

In the final weeks of October, major U.S. stock indices tumbled on election uncertainty, rising coronavirus infections, and renewed lockdowns. By month end, the S&P 500, DJIA, and Nasdaq Composite were all down more than 2%. Meanwhile in the municipal market, elevated supply of both tax-exempt and taxable municipal debt remained the primary story as issuers rushed to pull forward deals that would typically come to market in November during a non-election year. In total, October brought $65.2 billion of new issuance to market – the highest monthly figure since December 2017. As a result, municipal yields, represented by the AAA Municipal Market Data (MMD) curve, shifted upward across the entire curve. Yields inside of 10 years increased from 4-9 basis points (bps), while yields beyond 10 years closed the month up by 8-9 bps. After weeks of steady supply in the primary market, however, 30-day net supply is set to turn negative, with maturities far outstripping new supply as we head into the holiday season.

  • The Federal Reserve’s most recent policy meeting fell during the first week of November. Discussion was focused primarily on further methods to support the U.S. economy in the face of increasing coronavirus infections and renewed lockdowns, despite major U.S. stock market indices pushing record highs. Fed Chair Powell noted, “Economic activity has continued to recover… [but] the pace of improvement has moderated.” The Fed reiterated its commitment to provide sustained stimulus as needed, but indicated comfort in current policy and
    guidance.
  • New York’s Metropolitan Transportation Authority (MTA) announced plans to tap the Federal Reserve’s Municipal Liquidity Facility for a second time. This time, the MTA plans to borrow all ~$2.9 billion of remaining funds available through the program. With the MLF program set to expire in December and uncertainty surrounding its extension, the MTA is seeking help to cover an estimated $12 billion two-year budget deficit. According to the Authority’s chief financial officer, the MTA would pledge payroll mobility tax revenues.
  • Investment grade municipals and high yield municipals moved in opposite directions in October. The Bloomberg Barclays Municipal Bond Index returned -0.30% for the month, bringing its year-to-date total return to 3.02%, while the Bloomberg Barclays High Yield Municipal Bond Index gained 0.18%, bringing its year-to-date total return to 0.54%.
  • Following a month in which municipal yields increased across the curve and the Treasury curve experienced a bear steepener, municipal/Treasury taxable-equivalent spreads* increased modestly at the front end and decreased slightly at the long end of the curve in October. At month-end, taxable-equivalent spreads equated to 21 bps at the one-year tenor, 13 bps at the five-year tenor, 72 bps at the 10-year tenor, and 127 bps at the 30-year tenor.
  • Secondary market trade activity increased for the second straight month in October, with 679,000 total trades (up from 630,000) and $252 billion par traded (up from $218 billion).

Muni technicals in focus: Munis see record level of pre-election issuance

Markets reflected optimism to start the month in light of positive economic data and revived stimulus prospects, driving Treasury yields upwards. However, the outlook largely shifted during the latter half of the month, with the U.S. election approaching and states reporting record numbers of daily new COVID-19 infections. The Dow tumbled over 6% during the final week of October for both its worst week and month since March. In only three trading days, the VIX catapulted from roughly 27.5 to over 40 – roughly double the index’s long-term average. Anticipating heightened uncertainty, municipal issuers pushed to bring deals to market ahead of the election. With $65.20 billion in total new issuance, about one-third of which was taxable, October saw the second highest monthly municipal volume on record.

Despite the surge in supply, municipal yields did not move drastically during the month as demand remained robust. Retail municipal investors absorbed the elevated supply, pouring net $3.5 billion into municipal funds in October. With municipal yields generally tracking Treasuries’ upward trajectory, the Bloomberg Barclays Municipal Bond Index posted a negative return of -0.30% in October. Notably, while Treasury yields remained elevated at month-end – perhaps due to the perceived higher likelihood of stimulus following the resurgence in cases – the 10-year AAA municipal yield dipped to 0.93% to close the month.

Though many state and local government budget forecasts continue to project sizable budget gaps for 2021 and 2022, which we believe are likely to result in significant spending cuts absent additional federal aid, we do continue to see evidence of stability in parts of the market. For example, October brought news of surprising strength in the housing market, with the Case-Shiller Index climbing more than 5% from 2019 levels, despite the pandemic, and the Federal Housing Finance Agency reporting monthly growth in housing prices hitting nearly 30-year highs.

These trends should bode well for property tax collections, which are the primary revenue stream for local governments. On a granular level, October brought mixed news for high-profile issuers. We have seen some governments’ revenue collections beat their forecasts (for example, California reported revenues for the first three months of its fiscal year running approximately 15% ahead of budget). However, we continue to see a difficult road ahead for many larger urban governments, with Chicago releasing a 2021 budget in October that seeks to close an estimated $1.2 billion gap through a mixture of tax increases and deep spending cuts. Chicago and New York City were placed on negative outlook and downgraded by rating agencies, respectively, in October, and we anticipate downgrade risk to continue for many larger issuers disproportionately affected by diminished tourism, business activity, and event-related income.

October also brought a reminder that the pandemic may result in prolonged revenue concerns for corners of the market, as we saw a sustained rise in hospitalizations and positivity rates in many states. We believe the risks posed by new waves of the pandemic highlight the need for ongoing stress testing and thorough analysis of individual credits.

Figure 2: Municipal/Treasury after tax* spreads

Figure 3: Month-over-month change in MMD yields (bps)

Figure 4: Market data

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



1Jem Bartholomew and Dawn Lim, “Dow Wraps Up Worst Month Since March,” Wall Street Journal, 30 Oct 2020

2 The Bond Buyer: Primary Market Statistics – A Decade of Bond Finance, 31 Oct 2020

3 Thomson Reuters TM3 MMD Interactive Data, 30 Oct 2020

4 The Bond Buyer: 30-Day Visible Supply, 30 Oct 2020

5 Nick Timiraos, “Fed Says Virus Poses Considerable Risks, Maintains Low-Rate Pledges,” Wall Street Journal, 5 Nov 2020

6 Paul Burton, “New York MTA to tap Fed program to the max,” The Bond Buyer, 29 Oct 2020; Greg Mennis & Ben Henken, “New York Transit Authority Taps Into Federal Reserve Borrowing Program,” The PEW Charitable Trust, 9 Oct 2020

7 Bloomberg Barclays, 30 Oct 2020

8 Thomson Reuters TM3 MMD Interactive Data, 30 Oct 2020

9 The Bond Buyer: Secondary Market Data, 30 Oct 2020

10 Thomson Reuters TM3 MMD Interactive Data, 30 Oct 2020

11 CDC COVID Data Tracker, “United States COVID-19 Cases and Deaths by State”

12 Bloomberg

13 Ibid

14 The Bond Buyer, “Bond Sales (Latest Month)”, 30 Oct 2020

15 Refinitiv Lipper, 30 Oct 2020

14 Thomson Reuters TM3 MMD Interactive Data, 30 Oct 2020

15 Bloomberg Barclays Indices, 30 Oct 2020

18 Thomson Reuters TM3 MMD Interactive Data, 30 Oct 2020

19 Bloomberg, “Home Prices in 20 U.S. Metro Areas Rise Most in Two Years,” October 27, 2020, by: Prashant Gopal

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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.

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.

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 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.

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 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.

For institutional investor use only.

CMR2020-1110-1405640

Monthly Municipal Market Update, January 2021
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