In the 1Q 2020 issue of our quarterly publication, we:
- Discuss how IG muni credits are expected to weather the current market dislocation.
- Present views on the support of the CARES Act.
- Offer views on the spate of expected downgrades in the U.S. financials sector.
In the first quarter of 2020, the municipal market experienced a decade of turbulence. January and February experienced traditional municipal returns and new inflows from investors looking to take advantage of the high level of credit quality and after-tax income and returns that municipals provide, while March experienced pressure. It’s been a wild ride.
For the 14-month period ending February 2020, total municipal bond inflows were a record $120 billion in new monies. Through the end of February, the return on the S&P Municipal Bond Index—which includes an average maturity of 12 years, as well as both investment-grade (IG) and high-yield (HY), or below IG, bonds—was 2.9%, and the yield to worst was 1.34%. In contrast, the yield on 5- to 30-year AAA municipals reached their all-time lowest point in history in early March (0.49% in 5 years and 1.38% in 30 years).
During the first quarter, as COVID-19 began to creep up on the equity and Treasury markets, the municipal market began to experience selling pressure. Shareholders began to redeem shares in IG and HY mutual funds and ETFs on March 11 and it continued through the end of the quarter, reaching $30 billion in total outflows, according to Lipper.
By the end of March, the S&P Municipal Index returned –3.3% for the month and –0.58% year to date with the yield rising 0.73%. The $30 billion in outflows over this three-week period was the quickest and most sudden in municipal history. Typically, outflow cycles are longer (36 weeks on average) and the outflow dollar total is more spread out.
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