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Investment Strategies

Monthly Municipal Market Update, November 2022

A brief update on what's happening in the municipal bond market.
  • Investment grade municipal bonds notched their strongest month of gains since 1986 in November, outperforming U.S. Treasuries by 2%.
  • It appears likely the Federal Reserve will begin to moderate the pace of rate increases at their December meeting, likely opting for a half-percentage-point rate hike as opposed to a fifth consecutive three quarter-percentage-point hike.
  • We discuss some notable results from November’s midterm elections, and their anticipated impacts on the municipal market.
Figure 1 is a table showing AAA Municipal Market Data (MMD) yields, U.S. Treasury yields, and taxable-equivalent municipal yields as of November month-end, specifically at the two-year, five-year, 10-year and 30-year tenors of each curve. Investment grade municipals bonds notched their strongest month of gains since 1986 in November, outperforming U.S. Treasuries by 2%. The table shows that taxable-equivalent yields on AAA municipal bonds ranged from 4.27% for the 2-year tenor to 5.95% for the 30-year tenor in November. Taxable-equivalent yield assumes 37% federal income tax and 3.8% Medicare investment tax. A separate box below the table includes data showing that municipal issuance decreased by $8.6 billion month-over-month. Finally, the chart shows year-to-date returns for both investment grade munis and high yield munis, each of which have experienced negative returns.

November month in review

In a late November statement, Federal Reserve (Fed) Chair Jerome Powell noted that “the time for moderating the paceof rate increases may come as soon as the [Fed’s] December meeting,” giving credence to market expectations fora half-percentage-point rate hike in December, as opposed to a fifth consecutive 0.75% hike.

Meanwhile, New York Fed President John Williams expressed expectations for inflation pressures to subside in 2023,but cautioned that the risk of recession remains elevated due to the central bank’s aggressive tighteningefforts throughout 2022. Williams stated that if inflation declines in the coming year – which he anticipates itwill – the Fed may need to lower rates in 2024; however, he also alluded to a potentially challenging scenarioin which inflation could remain above the central bank’s 2% target despite easing demand and supplypressures.

U.S. Treasury note and bond prices increased in November, fueled by expectations for a slowdown in the pace of theFed’s aggressive rate-hike cycle and data that showed inflation eased in October. Given the inverse relationshipbetween prices and yields in the bond market, Treasury yields decreased at the 2-year tenor of the curve andbeyond. In particular, the 1-, 5-, 10- and 30-year tenors of the U.S. Treasury curve ended the month at 4.73%(+9 bps), 3.83% (-43 bps), 3.69% (-40 bps), and 3.81% (-40 bps), respectively. Notably, the Treasury curve is experiencingits deepest inversion in decades, with the 10-year Treasury note yielding less than the 2-year note by thelargest magnitude since the 1980s.

Investment grade municipal bonds notched their strongest month of gains since 1986 in November. Driven by recentFedspeak, decreasing rates, and moderating outflows, the Bloomberg Municipal Bond, High Yield Municipal Bond,and Taxable Municipal Bond indices gained 4.68%, 5.82%, and 4.50%, respectively. Moreover, municipals outperformed Treasuriesby 200 bps, the most in a single month since 2020. The 1-, 5-, 10- and 30-year tenors of the AAA MunicipalMarket Data (MMD) curve closed November at 2.49% (-63 bps), 2.63% (-61 bps), 2.71% (-68 bps), and 3.52% (-60bps), respectively.

Municipal primary market activity was muted in November. In fact, the penultimate month’s $20 billion of issuancemarked its lowest such figure since 1999, as issuers balked in the face of rising rates and uncertain Fedpolicy. While outflows persisted through much ofNovember, the pace slowed relative to October and ultimately reversed in the month’s final week. For the weekended 30 November, Lipper reported combined weekly and monthly inflows of $916 million, as flows into municipalETFs outweighed outflows from open-end mutual funds. This trend, coupled with abackdrop of declining yields and muted supply, presents a relatively favorable technical environment for theasset class as we round out the year.

We believe the municipal credit landscape remains positive, and upgrades continue to outpace downgrades at asignificant pace. In the third quarter alone, Moody’s reported 111 upgrades compared to 37 downgrades, a ratioof three to one. This marks the seventh consecutive quarter of upgrades outpacing downgrades within the assetclass.

Elections in focus: November midterms and their impact on the municipal market

On 8 November, millions of Americans hit the polls to vote for their congressional representatives and $66 billion worth of bond measures. Ultimately, the Democrats retained control of the Senate, the Republicans won a slight majority in the House of Representatives, and more than 80% of bond measures were approved.

In the Northeast, New York voters approved the $4.2 billion Clean Water, Clean Air, Green Jobs Bond Act. This proposal includes funding to update aging water infrastructure and protect water quality; reduce air pollution and lower climate-altering emissions; restore habitats; strengthen communities' ability to withstand severe storms and flooding; and preserve outdoor spaces and local farms. Additionally, it aims to ensure equity by investing at least 35% of resources in disadvantaged communities. On the tax front, some House Democrats who opposed the $10,000 cap on state and local tax (SALT) deductions lost their seats, including Sean Patrick Maloney from New York and Tom Malinowski from New Jersey. In Massachusetts, Democrat Governor-elect Maura Healey’s campaign for tax relief for the lower and middle classes in addition to increased social spending proved successful.

In the Southeast, Republican Governor Ron DeSantis won re-election in Florida. DeSantis’ threat to dissolve the Reedy Creek Improvement District (the special district in which Disney World is located) has led to uncertainty over who will inherit the district’s $1 billion in outstanding municipal debt. Meanwhile, an early December runoff election over Georgia’s open senate seat resulted in Democratic Senator Raphael Warnock’s re-election, defeating Republican challenger Herschel Walker.

In the Southwest, Austin, Texas, voters approved $3.56 billion of bonds: $2.44 billion for the city’s public school district, $770 million for the community college district, and $350 million for affordable housing. Also in Texas, a number of officials hostile to the growing ESG sector were re-elected. This includes Texas Attorney General Ken Paxton, who joined a Missouri-led multi-state probe to investigate whether S&P Global Ratings’ inclusion of ESG factors in their ratings politicizes financial analysis, potentially violating consumer protection laws.

In the Midwest, Michigan’s Democratic Governor Gretchen Whitmer won re-election. However, Michigan Democrats hold only a narrow legislative majority, and three-fifths approval is needed in the state for borrowing. Democratic Governor Tim Walz was re-elected in Minnesota, and he is expected to use the state’s surplus to fund various progressive initiatives. In the Forest Preserve District of Cook County, Illinois, voters approved a property tax hike which is expected to generate $40 million per year, intended to fund environmental issues and to help stabilize pensions. While the increase in tax revenues will not entirely resolve the district’s pension problem, it will prevent a direct confrontation between accommodating pension costs and operating costs.

In the West, former Democratic state House speaker Tina Kotek was elected governor of Oregon. She has indicated an intent to direct state funds toward improving the homeless crisis, mental health services, and education. In Nevada, incumbent Democratic Governor Steve Sisolak lost to Republican Joe Lombardo, who intends to veto any new tax increase and maintain the state’s tax-friendly reputation. In California, Governor Gavin Newsom won re-election, and the state’s schools had $23 billion of bonds on the ballot. Notably, San Diego Unified School District voters approved $3.2 billion for facility and safety improvements. Finally, California voters opposed Proposition 30’s income tax hike on the state’s highest earners. Revenues from the measure would have funded electric vehicle (EV) incentives, EV charging stations, and wildfire prevention initiatives; however, many opponents (including Governor Newsom) argued it was a ploy devised by rideshare companies to funnel state income tax revenues toward funding their mandated transition to EVs.

Monthly Municipal Market Update, November 2022

Monthly Municipal Market Update, November 2022

Monthly Municipal Market Update, November 2022

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

1 Nick Timiraos, “Jerome Powell Signals Fed Prepared to Slow Rate-Rise Pace in December,” Wall Street Journal, 30 Nov 2022

2 Nick Timiraos, “Fed’s Williams Says Inflation Fight Could Last Into 2024,” Wall Street Journal, 28 Nov 2022

3 Thomson Reuters TM3 MMD Interactive Data, 30 Nov 2022

4 Sam Goldfarb, “Yield Curve Inversion Reaches New Extremes,” Wall Street Journal, 29 Nov 2022

5 Bloomberg,30 Nov 2022

6 Thomson Reuters TM3 MMD Interactive Data, 30 Nov 2022

7 Jessica Lerner, “November issuance dips below $20B for first time since 1999,” Bond Buyer, 30 Nov 2022; Bloomberg Corporate Issued Municipals Data, 1 Dec 2022

8 Refinitiv Lipper US Flow, J.P. Morgan, 30 Nov 2022. Note: combined weekly and monthly flows

9 Moody’s Investors Service, “Rating revisions: upgrades substantially topped downgrades in Q3 2022,” 10 Nov 2022

10 Nic Querolo, “Voters Weigh $66 Billion Bonds”, Boomberg Briefs, 8 Nov 2022

11 Chip Barnett, “Reporters' roundtable: What midterms mean for munis,” The Bond Buyer, 22 Nov 2022

12 New York State. “Governor Hochul Announces First Clean Water Infrastructure Projects in the State to Receive Federal Bipartisan Infrastructure Law Funding,” 3 Nov 2022

13 Chip Barnett, “Reporters' roundtable: What midterms mean for munis,” The Bond Buyer, 22 Nov 2022

14 Jacob Schumer, “The Contractual Impossibility of Unwinding Disney’s Reedy Creek,” Bloomberg Tax, 26 Apr 2022

15 Chip Barnett, “Reporters' roundtable: What midterms mean for munis,” The Bond Buyer, 22 Nov 2022

16 Ibid

17 Ibid

18 Ballotpedia, “California Proposition 30, Tax on Income Above $2 Million for Zero-Emissions Vehicles and Wildfire Prevention Initiative (2022),” 5 Dec Nov 2022


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

Investing in municipal bonds involves the risks of investing in debt securities generally and certain other risks. Investors will, at times, incur a tax liability. 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. 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 increases 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. 

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.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.

Bloomberg 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 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 Bloomberg 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 Bloomberg 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. The Bloomberg Muni Short (1-5) Index is the Muni Short (1-5) component of the Bloomberg Municipal Bond Index. 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. ©2022, PIMCO.


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