In the 4Q 2020 issue of our quarterly publication, we:

  • Discuss the wild ride municipals took in 2020, including the impact of COVID-19, uncertainty around the presidential election, and record new issuance reached in the fourth quarter.
  • Detail M&A issuance in the nonprofit health systems as well as pressures seen in higher education and transportation.
  • Explain why comprehensive, careful credit research is so important. 

The past year in the municipal market will go down in history as one of the “wildest” years—from start to finish—as the market set historical records both in terms of record low yields (high bond prices), market volatility, and in terms of valuations to other investment-grade fixed income asset classes. Record inflows in 2019 continued through the first quarter of 2020, as COVID-19 and its devastating effects on the economy and financial markets increased market concern. Yields reached historic lows on March 10, 2020. On March 11, HYD, a municipal high-yield ETF, received a large outflow and delivered bonds to the end client—who then sold the bonds at distressed market prices—triggering a massive sell-off. Investor fears of the effects of COVID on municipal fiscal health took hold in both the high-yield and investment-grade municipal markets leading to over $50 billion in fund outflows over the next several weeks. Municipal yields increased, peaking on March 23 before markets stabilized. At the same time, investors began to recognize the value in municipals as inflows turned positive and yields again reached historic lows in early August. 

As we came into the fourth quarter, the November election caused municipalities to increase their debt issuance. Uncertainty surrounding the election and the continued effects of COVID caused an elevated rise in yields in September and October as municipalities rushed to market to issue before November 4. October new issuance set a record of $72 billion. Total municipal issuance for the year reached $500 billion. More important to tax-exempt municipal investors is the increase in the amount of taxable vs. tax-exempt municipal issuance, which increased to near-record levels. 

Please see important disclosures at the end of the commentary.

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