Municipal bonds rallied last week.1 The new issue calendar of $4.1 billion was readily absorbed.2Fund flows were -$315 million, but tax-exempt money market inflows totaled $885 million.3 This week’s new issuance is expected at $9 billion, composed mainly of mega deals that should be well received if priced to sell.2
The municipal bond market has a good tone, primarily because the Fed suggested it will hike rates once more in December and remain on hold for 2019. The Fed cited “equity volatility... and weak global demand” for ending rate increases. We feel pace of hikes is likely to slow.
We believe municipal market should finish 2018 strong. Bond redemptions through January 1 exceed new issue supply, resulting in negative net supply. We expect 2019 to be good for municipal bonds as we move to a neutral interest rate environment. Municipal investors can enjoy tax-exempt coupons at the cheapest yields in 10 years.
New York City issued $850 million of general obligation bonds (rated Aa2/AA).4 The intermediate portion was well received by individual investors. Long bonds were cheapened slightly for institutions, but all bonds were spoken for upon final pricing. Demand has been strong for deals in states like New York with high state taxes because of the reduced deduction for state and local taxes (SALT). Municipals are now even more attractive given their ability to allow investors to reduce taxes. We think national investors will show renewed interest in tax-exempt bonds as they begin to see the effects of reduced deductions in their states.
High yield municipal yields also rallied last week, decreasing by 5 to 6 bps.1 High yield municipal deals were heavily oversubscribed. Five years after filing bankruptcy, Detroit (rated Ba3/B+) will likely return to the municipal market with a general obligation debt offering.2 High yield fund flows remained negative last week, but net outflows continue to taper off.3 Heavy re-investment cash exists across the asset class from December cash flows.
High Yield, Investment Grade: A Tale Of Two Corporates
High yield corporate bonds ended a twoweek losing streak.1 Performance was helped by Fed comments that markets perceived as dovish and by hopes for a U.S.-China trade truce during the G-20 summit. High yield spreads tightened but remained near their widest levels of 2018.1Primary high yield issuance continued to be sluggish.2 For November as a whole, newissue volume was down about 80 percent versus the month’s average historical total.2
Investment grade corporates posted negative results for the third straight week.1 Spreads gapped wider to fresh highs for the year.1 With a loss of nearly 4% through the first 11 months of 2018, investment grade credit is currently on pace for its worst year since 2008.1
Emerging market (EM) debt rallied last week but still ended in negative territory for the month.1EM spreads were unchanged.1 Among EM currencies, the Chinese yuan weakened slightly ahead of the G-20 gathering. The Indian rupee outperformed, as falling oil prices have benefited oil importing countries such as India.
All securitized sectors finished the week with positive returns, led by mortgage-backed securities.1 After last week’s modest gain, asset-backed securities (ABS) are outpacing all taxable fixed-income categories for the fourth quarter to date.1 Treasuries are a close second.1 ABS is one of only a handful of taxable asset classes that isn’t in the red year to date through November.1