As the east coast digs out of the recent winter blast, the muni new issuance market is likely to be frozen for a while longer. Not because there are fundamental issues in the market, but because so much was issued in December, that there simply isn’t much left to do as we start 2018. We wrote about the tax-reform induced supply wave a few weeks ago here.
Thus far, the numbers are playing out as expected. December was a record month for muni issuance, with over $64 billion sold, surpassing the prior record in 1985 of ~$55 billion. Looking ahead, there was a meager $1 billion sold last week, and 30-day visible supply, which gives a rough indication of deals in the pipeline, stands at approximately $7.5B.
We think this means municipals are poised for a nice run relative to other investment grade sectors as there simply aren’t enough bonds to go around. Returns last week highlighted this as the ICE/BAML Municipal index was flat, while the ICE/BAML Government/Corporate Index fell slightly. And while 1-week does not make a year, it could be a precursor of things to come.
This trend is most impactful to our Blend Strategy, where we have the option of owning both taxable and tax-free bonds. As the muni market underperformed in December because of the heavy supply, we added exposure to the sector, and now look to benefit from the deep freeze. For more information on the Blend Strategy, see our recent blog post here.
Stay warm out there.
Source: ICE BAML, Janney Montgomery Scott, SIFMA
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