James Colby, Portfolio Manager, looks at municipal bond performance, and flows into muni bond funds, in the first quarter of 2019. He follows this up with some thoughts on yield curve positioning and his outlook going forward.
Municipal Bonds Performance and Inflows
I think it's fortunate that we’re talking about municipal bonds on the heels of a really historic first quarter of 2019 in terms of inflows into the municipal space, strong performance, and the fact that the Federal Reserve recently has decided to hold rates steady for the foreseeable future.
The amount of inflows that have come into the municipal space for both muni ETFs, as well as mutual funds, year to date 20191… we've experienced nearly $20 billion in terms of inflows into the space, which is a record since they were keeping track of these numbers, since 1992.
In addition to the inflows, the record inflows, this year, the marketplace has been rewarded with great performance, great for the municipal marketplace, up already over 2% for investment grade2and 2.5% for municipal high yield3. Both of those evidence a very strong start for the municipal marketplace year to date.
I think what has also been brought to the municipal marketplace is investor clarity with regards to tax reform. In particular, investors are impacted by the $10,000 cap on state and local taxes and for those who are in high-tax states, it's a very significant issue.
Yield Curve Positioning
The question arises: what have investors done so far this year and what has the market said is the opportune place to put your money? Well, strategists will say that because the yield curve is steep, the place to be is that the long end of the curve. In fact, the evidence shows that investors are doing just that, putting something more than a billion dollars’ worth of assets to work at the long end of the marketplace.
To include municipal high yield because the curve is still steep, credit spreads are wide enough to offer investors opportunity, they have also put significant assets to work in municipal high yield. I think that relationship will continue to prevail probably through the next quarter of 2019.
The strong performance of municipals year to date, which previously I alluded to, is really driven by a feature that we've been touting and others have been mentioning for quite some time. That is, an imbalance between demand and supply. That equation continues and low issuance continuing into the first and likely the second quarter of 2019 will continue to offer a platform for munis to perform very well. We continue to see demand to the quality and to the numbers that we have experienced so far in the first quarter of 2019, I believe munis will continue to perform very well.
Coming off what appears will be a very strong first quarter performance from municipals, it's hard to project too far out in the future, but going into the second quarter, I don't see anything that is going to derail the current process of investor demand. Strong inflows coupled with an asset class that has delivered the results that investors want, measured against the opportunities of other asset classes.
So putting together a balanced, well-constructed portfolio in this environment remains important, remains a key feature that I think advisors and individual investors will continue to focus on.
For the remainder of the first half of this year, I think munis will continue to perform well, deliver that income, deliver that return that we've seen so far in the first quarter.
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1Data as of 4/1/2019, Lipper Municipal Bond Fund Flows.
2Data as of 3/21/2019, Bloomberg Barclays Municipal Bond Index.
3Data as of 3/21/2019, Bloomberg Barclays High Yield Municipal Bond Index.
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The Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index. Bloomberg Barclays AAA Municipal Bond Index is a rules-based, market-value-weighted index measuring the non-investment grade and non-rated U.S. tax-exempt bond market.
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