Munis To Stay The Course In 2020 - For The Most Part

by Jeffrey Lipton December 23, 2019

For an inefficient market, munis have proven to be quite efficient with all of the complicated pieces fitting together quite nicely

The last FOMC meeting did little to keep issuers on the sidelines as taxable muni product continues to satiate the appetite of a redefined buyer base. The muni market has witnessed 49 consecutive weeks of positive mutual fund flows approximating a record $89.5 billion. Across the investment spectrum, cash has been deployed to traditional mutual fund outlets spurring meaningful growth and we have also seen record expansion of muni ETF’s with a 51% advance over last year. Oppenheimer Analysts expect 2020 to yield net positive flows even if there are episodic outflows. For the most part, this election cycle should have minimal effects upon the muni market as we are not factoring further major tax changes into our strategic guidance. Of course, our analyst will be on the lookout for any tax proposals that are potentially relevant to future demand and that appear to be gaining traction. Much of the current retail demand can be ascribed to the limitations placed on SALT deductibility under the Tax Cuts and Jobs Act.

The fourth quarter has been all about an awakening of supply, with the twist of heavy taxable issuance given the presence of compelling advance refunding conditions for outstanding tax-exempt debt. If January proves to be a typical “January Effect” month with smaller weekly calendars, there is the potential to book good performance. If the refunding math holds in - and we think it will – we can expect to see a continuation of outsized taxable issuance at least through the first quarter. This shifting dynamic creates opportunities for cross-over buyers (including retirement accounts) and foreign investors to add diversification and above average credit quality to their portfolios.

In terms of credit quality, we anticipate a further plateauing in 2020. Of course, there will always be the outliers, but generally we do expect relative stability across most sectors. We see continued nationwide growth, despite moderating GDP. In our view, issuers have been defensively positioning themselves in anticipation of the next contractionary period. Many are actively reducing their debt burden and state rainy day funds have grown appreciably thanks to more favorable tax collections. Upgrades are exceeding downgrades, yet we can expect to see a thinning gap going forward. Evolving events surrounding Puerto Rico’s restructuring have already given us food for thought as to how certain types of bond structures and creditors may be treated in bankruptcy, and we expect further observations to come about.

For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Advisor.

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