Munis Took Performance Back in July
We still believe that continued retail interest will drive performance through Q3 and into the fourth quarter of 2019.
Tax-exempt bond prices moved to higher ground throughout July, with the back end of the month seeing trading done in a much tighter range ahead of the Federal Open Market Committee (FOMC) meeting. Once the announcement of a 25 basis point rate cut was released, muni yields followed United States Treasury (UST) lower, but the fixed income rally was extended as President Trump escalated the trade tensions with threats of imposing additional tariffs on Chinese imports, thus raising the bets for further policy easing to temper a slowing global economy. As we try to gauge the impact of new tariffs upon Chinese imports, we would expect the haven bias to dominate the investment narrative over the near-term as the trade story encourages the market doves seeking enduring momentum towards lower rates in response to rising global uncertainty. This dynamic should bolster muni performance even with easing technicals.
We would ascribe the muni out-performance relative to UST to a very constructive technical backdrop highlighted by fairly light issuance patterns and strong seasonal reinvestment demand. Beyond August, reinvestment needs are expected to taper, giving rise to a weaker supply/demand dynamic, yet we still believe that continued retail interest will drive performance through Q3 and into the fourth quarter of 2019. Demand for munis continues to demonstrate unwavering support as the desire for tax-efficient investment has now led to 30 consecutive weeks of positive municipal bond mutual fund flows.
We believe that advancing volatility throughout the remainder of the year could make for more pronounced opportunities. If we do see expanding new-issue supply, we would expect this to come with better price discovery and improved liquidity conditions. For now, the relative tightness in quality spreads does not seem to provide fertile ground for extending risk. For the more conservative oriented investors, portfolio repositioning should reflect the potential impact of a shift in the economic cycle and so trading up in credit quality may be appropriate.
Analyst Certification -The author certifies that this research report accurately states his/her personal views about the subject securities, which are reflected in the ratings as well as in the substance of this report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.
Oppenheimer Credit Rating System:
Outperform (OP) - The analyst thinks that the security will outperform the average totalreturn of similar securities over the next 6 – 12 months.
Market Perform (MP) - The analyst thinks that the security will match the average total return of similar securities over the next 6 – 12 months.
Underperform (UP) - The analyst thinks that the security will underperform the average total return of similar securities over the next 6 – 12 months.
Not Rated: (NR) Oppenheimer does not rate the security.
Conflicts of Interest - Oppenheimer & Co. Inc.’s fixed income research analysts are compensated from revenues generated by various Oppenheimer & Co. Inc. businesses including the Oppenheimer & Co. Inc. Investment Banking Department, Taxable Fixed Income Capital Markets Department and Municipal Capital Markets Group. Research analysts do not receive compensation based upon revenues from specific investment banking transactions, specific sales and trading transactions or on revenues derived from investment banking services provided to a specific issuer or industry sector. Oppenheimer & Co. Inc. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company (or entity) that such research analyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an officer, director or advisory board member of a company (or entity) that such analyst covers.
Oppenheimer & Co. Inc. trades as principal the fixed income securities (or related derivatives) that are the subject of this research report and may at any time have proprietary positions in the securities (or related derivatives) that are the subject of this research report. Oppenheimer & Co. Inc. may have a long or short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon.
Oppenheimer & Co. Inc. has or may seek to have an investment banking, underwriting, advisory, lending or other credit relationship with the company (or entity) that is the subject of this report., This may at times give rise to potential conflicts of interest.
This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. or any particular investor. The securities mentioned in this report may be thinly traded; their prices, value and/or income they produce may be subject to extreme volatility. These debt securities are not suitable for all types of investors. Investors that are not “Qualified Institutional Buyers” or “QIBs” (as defined in SEC 144A) should not purchase or sell any of the securities mentioned herein without contacting a financial adviser in such investor’s jurisdiction to discuss the investors particular circumstances.
This report is based on public information. Oppenheimer & Co. Inc. makes every effort to use reliable, comprehensive information, but Oppenheimer & Co. Inc. makes no representation that it is accurate or complete. All estimates, opinions and recommendations expressed herein constitute judgments of the Oppenheimer & Co. Inc.’s research analyst as of the date of this report and are subject to change without notice. Oppenheimer & Co. Inc. has no obligation to update this report. No statement contained in this report should be misinterpreted as a guarantee of the future performance of any recommended securities.
This research contains the views, opinions and recommendations of Oppenheimer & Co. Inc. fixed income research analysts. Research analysts routinely consult with Oppenheimer & Co. Inc. trading desk personnel in formulating views, opinions and recommendations in preparing research. Trading desks may trade or have traded as principal on the basis of research analysts’ views and reports. Therefore, this research may not be independent from the proprietary interests of Oppenheimer & Co. Inc. trading desks, which may conflict with an investor’s interests. In addition, while research analysts do not receive compensation based on any specific investment banking transactions, specific sales and trading transactions or on revenues derived from investment banking services provided to a specific issuer or industry sector, research analysts do receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, trading desk and firm revenues, and competitive factors..
This report is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited.
To the extent this report references municipal securities, investors should consult with their tax or accounting advisor(s) regarding the suitability of tax-exempt investments in their portfolio as Oppenheimer & Co. Inc. does not offer tax or accounting advice. Income generated from investments in municipal securities may be subject to state and local taxes as well as the Alternative Minimum Tax. Municipal securities are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. Non-rated municipal bonds or municipal bonds rated below investment grade are speculative in nature and may not be suitable for all investors.
This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This research is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied.
Distribution in Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by Oppenheimer Investments Asia Limited (OIAL) to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. OIAL, an affiliate of Oppenheimer & Co. Inc., is regulated by the Securities and Futures Commission for the conduct of dealing in securities and advising on securities. For professional investors in Hong Kong, please contact researchasia@opco for all matters and queries relating to this report.
This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2019.
Oppenheimer & Co. Inc. transacts business on all principal exchanges.