Munis Outperformed Treasuries In 2019
- January 7, 2020
Poised For More Modest Positive
Returns In 2020
Munis are well-positioned entering 2020 against a backdrop of compelling market technicals and a largely stable credit outlook that will likely bring continued active buyer interest from individuals and mutual funds
If it were not for the deluge of late-year supply, 2019 muni performance would have likely risen closer to or perhaps above 8 handle returns. Away from technicals, 2019 muni performance was supported by a persistent flight-to-quality trade, a shift to a dovish Fed bias, decelerating U.S. GDP growth, and a slowing global economy that collectively escorted long muni yields lower by over 90 basis points throughout the year. Similar to 2019, this unique technical environment with demand as an unwavering constant should be a key driver of performance in 2020 and munis can be expected to outperform Treasuries again even with anticipated higher volume in 2020. Aside from expectations for further taxable supply, overall 2020 volume will be determined by views on interest rates, the pipeline of critically needed bedrock financing coupled with voter authorized bond referenda, and the outlook for the economy in general and for muni credit specifically.
In 2020, taxable muni presence should appeal to existing tax-efficient investments such as retirement accounts seeking alternative investment proxies, as well as to foreign buyers desiring to add diversification and higher credit quality to their portfolios against a backdrop of negative yielding global sovereign debt (although such debt may continue to abate in 2020), helping to form a redefined buyer base. In 2019, bid-wanted activity did not weigh heavily upon the muni market and there was no shortage of deployable cash as 52 consecutive weeks of positive mutual fund flows defined the technical backdrop.
We enter 2020 without the worry of a government shutdown, and for the new year, we are likely to see further Congressional consideration to repeal (temporary or permanent) the State and Local Tax (SALT) deduction cap as lobbying efforts from various public finance organizations remain active, but there may be a number of competing and priority bills that may dilute such efforts and there would need to be a larger legislative conduit that would include any SALT relief package, all to be a tall order in this election year. Thus, we assign a low probability of SALT repeal in 2020.
For a comprehensive portfolio evaluation of your municipal holdings, please contact your Oppenheimer Financial Advisor.
Jeffrey Lipton
Title:Managing Director, Head of Municipal Research and Strategy
85 Broad Street
26th Floor
New York, New York 10004
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