Month in review
Monthly municipal bond issuance in September totaled $35.4 billion, surpassing $35 billion for only the third time this year. AAA municipal yields rose by at least 17 basis points (bps) across the curve, with the greatest increase of 25 bps month-over-month occurring at the 1-year tenor.1
- On September 18, the Federal Reserve cut interest rates by a quarter point, with Chair Powell leaving the door open to additional cuts but declining to offer assurance. The move marked the Fed’s second such action this summer to aid the continuation of the current expansion. The Fed also injected billions into overnight repo markets starting on September 17 to keep the Secured Overnight Financing Rate (SOFR) in check.2
- The Bloomberg Barclays Municipal Bond Index returned -0.80% in September, as higher yields across the curve resulted in the first month of losses for the broad municipal bond market since October 2018.3
- Muni/Treasury ratios increased across the curve in September. Notably, the two-year ratio moved from 67% to 75%, and the 10-year ratio increased from 81% to 85%.4
- September’s primary market issuance of $35.4 billion represented a 7.9% decrease from August 2019 but a 40.3% increase over September 2018.5
- Secondary market trade volume slowed during September, with par traded totaling just $225 billion and the quantity of trades tallying just 630,000 (down 8.8% and 5.3% from August, respectively). The latter marks the fifth straight month of declining trades.6
Muni credits in focus: uncovering overlooked credit risk
The Bloomberg Barclays Municipal Bond Index suffered its first monthly loss of 2019, falling by 0.80% as rates rose across U.S. fixed income markets.7 Retail demand for municipal bond mutual funds has remained robust, though average annual net inflows slowed slightly from a torrid weekly average pace of about $1.85 billion in August to an average of $1.31 billion in September.8 On the supply side of the equation, new issuance surged to $35.4 billion, which is 40% above September 2018 levels – though we would note that more than half of this increase was driven by issuance of taxable municipals.9 This trend has continued since July, as large issuers, such as the Bay Area Toll Authority, chose to advance-refund outstanding tax-exempt bonds with new issuance of taxable debt.10 We expect technicals to remain supportive in high-tax states, as a legal challenge to the state and local tax (SALT) deduction cap ushered in by the 2017 Tax Cuts and Jobs Act was thrown out of federal court at month’s end.11
The broad muni credit landscape continues to look relatively rosy, with state and local government tax revenues from major sources increasing by 4.2% year-over-year in the first quarter of 2019.12 However, against this positive economic backdrop, idiosyncratic credit stress flared up in two separate instances this month, highlighting the importance of intensive fundamental credit research.
In California, officials of a unified school district were charged by the SEC with defrauding investors by omitting information when the district issued bonds in 2016.13 In Wisconsin, a multifamily housing bond backed by a charitable foundation was downgraded 11 notches to CCC by S&P Global Ratings in one fell swoop.14 We believe both instances illustrate why deep, forward-looking credit research is vital in seeking to protect principal and enabling our team to identify and avoid obligors that we believe are subject to material risks that may be overlooked.
To learn more about investing in municipals at PIMCO, please visit pimco.com/munis