long-term outlook â september 2014
THE MUNICIPAL MARKET MONITOR (TM3) LONG-TERM OUTLOOK – SEPTEMBER 2014 MMD STRATEGY FOR MUNI INVESTORS – 10 YEARS RECOMMENDED FOR REINVESTMENT NEW MONEY OPPORTUNITIES SHOULD APPEAR THIS FALL [email protected]
Current Muni/Tsy Ratios Illustrates that Municipal Bonds Remain "Rich" While the case for "value" (using the muni/tsy ratios as a benchmark) has improved it still remains weak in virtually every range of the yield curve. MMD continues to suggest that investors sit on the sidelines. Current Muni/Tsy Ratio 12‐month Avg. Muni/Tsy Ratio Difference (pct. points) 3‐month Avg. Muni/Tsy Ratio Difference (pct. points)
5yr 65.1 76.4 ‐11.3 72.4 ‐7.3
10yr 87.4 91.7 ‐4.3 89.5 ‐2.1
1
15yr 104.9 113.9 ‐9.0 108.3 ‐3.4
2
20yr 116.2 128.2 ‐12.0 120.6 ‐4.4
30yr 96.3 103.5 ‐7.2 99.0 ‐2.7
2014 has produced a volatile range for the MMD/Tsy AAA 10‐year ratio. But, since June the ratio could be finding its balance. In the early half of the year, the 10‐year MMD/Tsy ratio had some wild swings from 98% to 83.5%. But, since the start of June the ratio has found a contracting range which likely correlates to muni re‐investment being hefty over the summer months. The range since June has been 93.3% to 86.1%. The average for this period is 89.3%. The 1 2
This is the 15yr AAA GO muni scale as a % of 10yr tsys. This is the 20yr AAA GO muni scale as a % of 10yr tsys.
MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
average for 2014 is 89.8%. Meanwhile, the 12 month average is 91.9%, supporting our continuing claims that value in the tax‐exempt municipal sector remains difficult to find.
Volatility & The Lag of Munis Recently we observed that the backdrop of a steadying US treasury market did not deter the tax‐exempt sector from its traditional lag momentum. Following a recent Tuesday (9/3) weak tone in US treasuries, the tax‐exempt market showed reaction on Wednesday (9/4), with yields as much as 2‐5bps weaker. On Wednesday the 10yr muni/tsy ratio closed higher at 88.4% (versus 87.1% on Tuesday) as did the 30yr muni/tsy ratio at 98.4% (versus 96.5% on Tuesday.) The change in the 10 year muni/tsy ratio was 1.66% higher on Wednesday night than for Tuesday. For the 30 yr muni/tsy ratio this change was 1.89%. 9/2/14 9/3/14
10yr 87.14% 88.80% 1.66%
30yr 96.52% 98.41% 1.89%
Has this lag changed during the past few years? How many times during the past 12 month has this move exceeded 1%? Using MMD Interactive we found that during the past three years these ratios have experienced less volatility. 10yrs 30yrs 9/13‐9/14 87/250 (34.8%) 51/250 (20.4%) 9/12‐9/13 128/248 (51.6%) 93/248 (37.73%) 9/11‐9/12 173/250 (69.2%) 140/250 (56.0%) Note: This table lists the number of trading sessions the change was more than 1% and the total number of trading sessions.
Another measure of risk available to MMD subscribers is standard deviation. Using MMD Interactive we found that the Standard Deviation has also generally decreased during the past few years. 10yrs 30yrs 9/13‐9/14 4.25 9/12‐9/13 5.07 9/11‐9/12 9.21 2014
5.47 8.45 7.96
Date of issue: 9/11/2014
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MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
2013
2012
Flatter Yield Curve Once again, the 10/30 yr muni slope hit its 12‐month lows of +95bps on Friday where it currently resides. Our research tells that in general, the steeper the curve, the higher the expected economic growth. The opposite is true for flatter curves.
Date of issue: 9/11/2014
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MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
Credit Spreads Remain Low
Credit spreads remain low and it appears that investors who take on additional credit risk may underperform relative to high grade investors, especially in a rising interest rate environment. In the 10 year range the “A/AAA” GO spread is currently +58 bps. During the past 12 months it has averaged +70.2 bps. Therefore investors will experience better performance with the safer AAA GO bonds should mean reversion occur. Current A/AAA GO spreads +58 bps 12‐month average A/AAA GO Spreads +70.2 bps Mean reversion (12.2 bps) – underperformance
Date of issue: 9/11/2014
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MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
Lower Volume of Issuance January February March April May June July August
2012 2013 $17,453.80 $27,021.90 27,027.80 24,576.90 34,786.00 32,747.60 34,848.70 38,290.60 37,887.90 30,296.80 43,448.60 26,065.90 28,635.60 30,181.70 33,495.10 22,827.80 First six months 232,009.20 Comparison versus 2013 September 26,362.30 21,375.00 October 35,129.00 28,875.30 November 33,775.40 24,554.30 December 26,758.60 26,952.80 Total
$379,608.80 $333,766.60
2014 $19,385.80 16,312.70 28,137.20 26,478.60 27,582.00 35,316.50 25,606.10 24,604.10 203,423.00 ‐12.3% ....... ....... ....... .......
Source: Thomson Reuters
Municipal bond issuance has been lower than in 2013. Janney Capital Markets issued a report3 that best summarizes why the municipal bonds market may see continued decreased volume for the foreseeable future. These factors include the following: higher interest rates; direct bank loans; austerity measures; less flexibility in spending; political attitudes; and lack of broad public support of infrastructure spending. Fund Flows Continue To Be Tied Into Interest Rates Muni bond funds reported $379.8mln of net inflows for the week ended September 3, compared with $446.4mln in inflows in the previous week, according to data released by Lipper yesterday afternoon. The four‐week moving average remained positive at $481mln. High‐yield muni bond funds reported inflows of $104.1mln, down from $229.8mln in the previous week. Investor money has washed into municipal bond funds for 29 out of 36 weeks this year, and for the year to date there have been $13 billion in net inflows. These inflows should continue to be correlated with declining interest rates. The following table indicates why inflows have been so favorable in the muni market: Inflows change AAA GO Date $mln $mln 10yr 20yr 30yr 9/3/14 379.8 ‐66.6 2.14% 2.86% 3.10% 8/27/14 446.4 ‐2.3 2.10% 2.84% 3.80% 8/20/14 448.7 ‐199.4 2.14% 2.89% 3.15% 8/13/14 648.1 631.5 2.15% 2.93% 3.20% 8/6/14 16.6 ‐402.0 2.22% 3.00% 3.25% 7/30/14 418.6 ‐267.6 2.22% 3.02% 3.26% 7/23/14 686.2 528.4 2.19% 2.98% 3.26% 7/16/14 157.8 948.2 2.31% 3.09% 3.36% 7/9/14 ‐790.4 ‐809.8 2.38% 3.15% 3.42% 7/2/14 19.4 2.33% 3.10% 3.35%
3
“The Rime of Municipal Bond Issuance” Janney Capital Markets, May 22, 2014
Date of issue: 9/11/2014
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MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
Conclusion – MMD Recommends Continuing to Wait For A Better Entry Point For New Money Municipal bond investors have experienced a powerful rally during the first eight months of 2014 as light issuance has been combined with strong reinvestment driving spread product tighter. However it is difficult to imagine continued significant municipal bond strength if the trend in global rates and credit spreads stagnates. MMD maintains that we remain in a challenging period for new money entry in the muni market because “value” remains almost non‐existent and Fed policy remains uncertain though it appears that rates will have wait for a rise until 2015. Although we have seen some evidence to support US economic growth we feel that the Fed still needs further signals of economic growth before changing policy. In the meantime, MMD continues to recommend that those who must reinvest in the muni market buy liquid bonds in the 10 year range.
Date of issue: 9/11/2014
6 /6
Current Muni/Tsy Ratios Illustrates that Municipal Bonds Remain "Rich" While the case for "value" (using the muni/tsy ratios as a benchmark) has improved it still remains weak in virtually every range of the yield curve. MMD continues to suggest that investors sit on the sidelines. Current Muni/Tsy Ratio 12‐month Avg. Muni/Tsy Ratio Difference (pct. points) 3‐month Avg. Muni/Tsy Ratio Difference (pct. points)
5yr 65.1 76.4 ‐11.3 72.4 ‐7.3
10yr 87.4 91.7 ‐4.3 89.5 ‐2.1
1
15yr 104.9 113.9 ‐9.0 108.3 ‐3.4
2
20yr 116.2 128.2 ‐12.0 120.6 ‐4.4
30yr 96.3 103.5 ‐7.2 99.0 ‐2.7
2014 has produced a volatile range for the MMD/Tsy AAA 10‐year ratio. But, since June the ratio could be finding its balance. In the early half of the year, the 10‐year MMD/Tsy ratio had some wild swings from 98% to 83.5%. But, since the start of June the ratio has found a contracting range which likely correlates to muni re‐investment being hefty over the summer months. The range since June has been 93.3% to 86.1%. The average for this period is 89.3%. The 1 2
This is the 15yr AAA GO muni scale as a % of 10yr tsys. This is the 20yr AAA GO muni scale as a % of 10yr tsys.
MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
average for 2014 is 89.8%. Meanwhile, the 12 month average is 91.9%, supporting our continuing claims that value in the tax‐exempt municipal sector remains difficult to find.
Volatility & The Lag of Munis Recently we observed that the backdrop of a steadying US treasury market did not deter the tax‐exempt sector from its traditional lag momentum. Following a recent Tuesday (9/3) weak tone in US treasuries, the tax‐exempt market showed reaction on Wednesday (9/4), with yields as much as 2‐5bps weaker. On Wednesday the 10yr muni/tsy ratio closed higher at 88.4% (versus 87.1% on Tuesday) as did the 30yr muni/tsy ratio at 98.4% (versus 96.5% on Tuesday.) The change in the 10 year muni/tsy ratio was 1.66% higher on Wednesday night than for Tuesday. For the 30 yr muni/tsy ratio this change was 1.89%. 9/2/14 9/3/14
10yr 87.14% 88.80% 1.66%
30yr 96.52% 98.41% 1.89%
Has this lag changed during the past few years? How many times during the past 12 month has this move exceeded 1%? Using MMD Interactive we found that during the past three years these ratios have experienced less volatility. 10yrs 30yrs 9/13‐9/14 87/250 (34.8%) 51/250 (20.4%) 9/12‐9/13 128/248 (51.6%) 93/248 (37.73%) 9/11‐9/12 173/250 (69.2%) 140/250 (56.0%) Note: This table lists the number of trading sessions the change was more than 1% and the total number of trading sessions.
Another measure of risk available to MMD subscribers is standard deviation. Using MMD Interactive we found that the Standard Deviation has also generally decreased during the past few years. 10yrs 30yrs 9/13‐9/14 4.25 9/12‐9/13 5.07 9/11‐9/12 9.21 2014
5.47 8.45 7.96
Date of issue: 9/11/2014
2 /6
MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
2013
2012
Flatter Yield Curve Once again, the 10/30 yr muni slope hit its 12‐month lows of +95bps on Friday where it currently resides. Our research tells that in general, the steeper the curve, the higher the expected economic growth. The opposite is true for flatter curves.
Date of issue: 9/11/2014
3 /6
MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
Credit Spreads Remain Low
Credit spreads remain low and it appears that investors who take on additional credit risk may underperform relative to high grade investors, especially in a rising interest rate environment. In the 10 year range the “A/AAA” GO spread is currently +58 bps. During the past 12 months it has averaged +70.2 bps. Therefore investors will experience better performance with the safer AAA GO bonds should mean reversion occur. Current A/AAA GO spreads +58 bps 12‐month average A/AAA GO Spreads +70.2 bps Mean reversion (12.2 bps) – underperformance
Date of issue: 9/11/2014
4 /6
MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
Lower Volume of Issuance January February March April May June July August
2012 2013 $17,453.80 $27,021.90 27,027.80 24,576.90 34,786.00 32,747.60 34,848.70 38,290.60 37,887.90 30,296.80 43,448.60 26,065.90 28,635.60 30,181.70 33,495.10 22,827.80 First six months 232,009.20 Comparison versus 2013 September 26,362.30 21,375.00 October 35,129.00 28,875.30 November 33,775.40 24,554.30 December 26,758.60 26,952.80 Total
$379,608.80 $333,766.60
2014 $19,385.80 16,312.70 28,137.20 26,478.60 27,582.00 35,316.50 25,606.10 24,604.10 203,423.00 ‐12.3% ....... ....... ....... .......
Source: Thomson Reuters
Municipal bond issuance has been lower than in 2013. Janney Capital Markets issued a report3 that best summarizes why the municipal bonds market may see continued decreased volume for the foreseeable future. These factors include the following: higher interest rates; direct bank loans; austerity measures; less flexibility in spending; political attitudes; and lack of broad public support of infrastructure spending. Fund Flows Continue To Be Tied Into Interest Rates Muni bond funds reported $379.8mln of net inflows for the week ended September 3, compared with $446.4mln in inflows in the previous week, according to data released by Lipper yesterday afternoon. The four‐week moving average remained positive at $481mln. High‐yield muni bond funds reported inflows of $104.1mln, down from $229.8mln in the previous week. Investor money has washed into municipal bond funds for 29 out of 36 weeks this year, and for the year to date there have been $13 billion in net inflows. These inflows should continue to be correlated with declining interest rates. The following table indicates why inflows have been so favorable in the muni market: Inflows change AAA GO Date $mln $mln 10yr 20yr 30yr 9/3/14 379.8 ‐66.6 2.14% 2.86% 3.10% 8/27/14 446.4 ‐2.3 2.10% 2.84% 3.80% 8/20/14 448.7 ‐199.4 2.14% 2.89% 3.15% 8/13/14 648.1 631.5 2.15% 2.93% 3.20% 8/6/14 16.6 ‐402.0 2.22% 3.00% 3.25% 7/30/14 418.6 ‐267.6 2.22% 3.02% 3.26% 7/23/14 686.2 528.4 2.19% 2.98% 3.26% 7/16/14 157.8 948.2 2.31% 3.09% 3.36% 7/9/14 ‐790.4 ‐809.8 2.38% 3.15% 3.42% 7/2/14 19.4 2.33% 3.10% 3.35%
3
“The Rime of Municipal Bond Issuance” Janney Capital Markets, May 22, 2014
Date of issue: 9/11/2014
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MMD Long‐Term Strategy Report September 2014
Municipal Market Monitor
Conclusion – MMD Recommends Continuing to Wait For A Better Entry Point For New Money Municipal bond investors have experienced a powerful rally during the first eight months of 2014 as light issuance has been combined with strong reinvestment driving spread product tighter. However it is difficult to imagine continued significant municipal bond strength if the trend in global rates and credit spreads stagnates. MMD maintains that we remain in a challenging period for new money entry in the muni market because “value” remains almost non‐existent and Fed policy remains uncertain though it appears that rates will have wait for a rise until 2015. Although we have seen some evidence to support US economic growth we feel that the Fed still needs further signals of economic growth before changing policy. In the meantime, MMD continues to recommend that those who must reinvest in the muni market buy liquid bonds in the 10 year range.
Date of issue: 9/11/2014
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