In the 4Q 2019 issue of our quarterly publication, we:
- Provide an overview of performance in the 4Q 2019 municipal market.
- Explain why demand is outpacing supply, municipal yield curves are flattening, and credit spreads are tightening.
- Explore why muni issuers are flocking to the taxable market.
Supply is in demand
Municipal fixed income returns for 2019 were strong in the fourth quarter and among the best of the decade for the full year. The S&P Municipal Bond Index, which comprises over 200,000 individual securities with a total market value of nearly $2.5 trillion, ended 2019 an impressive 7.3% higher compared to the 1.4% increase seen in 2018. Although returns were strongest the first six months of 2019, every month but September contributed to the favorable results. Driving returns were strong market technicals, lower rates, and a stable credit environment.
Both investment-grade and high-yield municipal returns were strong in 2019. The S&P Municipal Bond Investment Grade Index returned a robust 7.0% for the year compared to just 1.1% in 2018. Meanwhile, the S&P Municipal Bond High Yield Index returned a strong 10.8% compared to 5.2% in 2018.
Returns across the curve were favorable with the S&P Municipal Bond Investment Grade Short, Short Intermediate, and Intermediate indices at 3.1%, 4.7%, and 6.9%, respectively. Likewise, the S&P Municipal Bond California and New York indices generated robust returns for the year of 7.4% and 7.0%, respectively.
Both supply and demand surprised to the upside in 2019. Municipal fund flows supported municipal valuations, turning positive the last week of 2018 and remaining positive for 52 consecutive weeks in 2019. Funds flow (Investment Company Institute) for the year of $92 billion set a calendar year high and came in 19% over the previous high in 2009.
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