In the 3Q 2018 issue of our quarterly publication, we:
- Provide a round-up of yields across the muni spectrum and an overview of yield curves, performance, and fund flows.
- Offer our outlook for 4Q, framing it in terms of our core narrative.
- Explore how—in light of the rising rate environment and the lowering of bond prices—a mitigating factor that may not fully offset lower market values provides support from the income generation perspective. This is particularly true as time passes for short to intermediate portfolios, and holds for both passively and actively managed strategies.
Headache or head fake? It isn’t a death knell. No, no one would say that. It’s more like a headache. Not even a migraine, just a garden-variety, distracting, but still-throbbing headache. We are in the midst of an abiding increase in interest rates, or at least so it seems. To be sure, the sting of an upward shifting yield curve has dispensed a modicum of hurt to tax-exempt municipal bond investors over the past nine months, and particularly in the third quarter. The year-over-year shortage in supply hasn’t been enough to offset upward pressure on yields, and drab, slightly negative municipal market performance has kept mutual fund inflows only hand hot.
Meanwhile, the 2017 Tax Cuts and Jobs Act cast a cloud of ennui over the municipal bond market. The bite of the elimination of advance refundings has issuers exploring new ways to retain financing flexibility—we have noticed a slight uptick in shorter call options in some new deal structures—while the removal of the state and local tax (SALT) deduction has some investors revisiting the benefits of investing in municipal bonds issued within their state of residence, particularly California and New York denizens. We remind you that California and New York are among the states with the highest income taxes, and represent the two largest as measured by outstanding market value, roughly 16.30% and 12.29%, respectively. It may be sensible to consider a state-specific portfolio if you are a resident of one of those two.
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