5/27/2022 Market Commentary
After months of rising rates, municipal bond yields have made an astounding reversal over the past week. Since Wednesday of last week, the 10-Year and 30-Year MMD have dropped by 45 and 46 basis points, respectively. As of Thursday afternoon, MMD yields have fallen for six consecutive trading days.
There is a variety of factors behind the municipal bond rally. Over the last several months, steep outflows out of municipal bond mutual funds have caused municipal bonds to underperform Treasuries. This caused municipal bonds to trade at prices that were very attractive relative to the Treasury market. The attractive yields hit a point last week that was enticing enough to bring in a large influx of buyers.
The volatility in the stock market has given investors a more risk-off mentality, and many investors have crossed over into the fixed income market in a flight-to-safety bid. Municipal bond yields, at their current prices, drew in a large portion of these buyers. The large uptick in demand, coupled with a low supply of bonds coming to market in the weeks surrounding Memorial Day Weekend, were the drivers of this market rally.
Tax-exempt yields over the past week
| 10-Year MMD | 30-Year MMD | |
|---|---|---|
| May 20, 2022 | 2.93% | 3.29% |
| May 26, 2022 | 2.57% | 3.91% |
| Change (bps) | -36 | -38 |
The influx of municipal bond buyers did not carry over to the Treasury market. Treasuries saw very little movement this week in fact, a sharp contrast to the municipal bond market rally. On Wednesday, the Federal Open Markets Committee released their minutes from their meeting earlier this month. Nothing in the minutes drew a reaction from Treasuries. The minutes show that the Fed is still intent on combatting inflation, however, it gave hints that the Fed could back off some on their rate hikes if the labor market begins to deteriorate. Many found the minutes to be more dovish than expected.
Treasury yields over the past week
| 10-Year Treasury | 30-Year Treasury | |
|---|---|---|
| May 20, 2022 | 2.79% | 3.00% |
| May 26, 2022 | 2.76% | 2.98% |
| Change (bps) | -3 | -2 |
Written by Dan Shaw, Oppenheimer & Co. Inc., Public Finance Associate.
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