Heavy Muni Supply Limits October Performance
Were it not for heavy weekly calendars advancing technical pressures last month, munis would have likely posted better performance
Given the recent 25 basis point cut in the funds rate, the taxable advance refunding environment should entice additional issuers to access the muni market for a while longer, but again we are calling for a drop off in supply through November and December. With October now in the rear-view mirror, Oppenheimer Analyst think that the technical picture can improve with holiday season distractions and slowdowns moving in, a typical time where issuance activity tends to retrench.
Parsing the Bloomberg/Barclays indices for October, munis returned to positive ground from the prior month, gaining 18 basis points versus +7 basis points for Treasuries; year-to-date, munis are returning 6.94%, while Treasuries are booking 7.78% (performance figures as of 10/31/19). The potential to unlock higher levels of return through year-end will be dependent upon a more constructive technical backdrop. Even with the heavier fall issuance, the pace of muni fund flows remains largely unabated and relative value ratios avoided potentially higher levels, which speaks to the solid demand profile of the asset class. If our Analysts thoughts on remaining volume for the year prove correct, there is potential for munis to outperform U.S. Treasuries.
Between now and year-end, muni fund flows should stay the course given our technical expectations and we will be closely following ratio movements with the hopes of identifying opportunities. Current Muni/Treasury relationships may reflect appropriate entry if ratios move lower to richer levels, a probable scenario if technicals grow stronger. As we have been discussing, there has been a material increase in taxable issuance for not only new-money purposes, but to also advance refund tax-exempt debt ahead of the first optional call date now that the cost-savings math works in the issuer’s favor and there is a clear advantage to enter the market now as opposed to waiting until a tax-exempt current refunding can be sold within the 90-day window before the first call.
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