Muni Fortnightly - Baird
WEALTH SOLUTIONS GROUP
Muni Fortnightly
Treasury yields fell sharply for the second consecutive week on coronavirus impacts on risk tolerance and potential impacts on the real economy.
PWM Fixed Income Research
David N. Violette, CFA, Vice President SDeanveiorVFioixleetdteI,nCcFomA,eVAicnealPyrset sident Senior Fixed Income Analyst
February 3, 2020
Bottom Line:
? Treasury fell sharply on both Coronavirus risk perception and poor economic data. ? Muni funds completed the 56th consecutive week with net inflows. ? BAML Muni Index total return for January was 1.79%. ? S&P Puerto Rico Total Return Index +2.51 % month-to-date.
What Happened in the Bond Markets Last Week? ? Treasuries, for the second consecutive week, staged a sizeable rally as coronavirus takes risk tolerance off the table (equities lower, credit wider and implied volatility higher). The front end of the curve is once again inverted as it had been during the past year's economic contractionary fears. During the week, economic data were mixed: although the headline GDP was fine at 2.1% the sub-indexes showed key areas of weakness, namely consumer. The market-implied probability for a rate cut in mid-2020 has risen to ~80%. ? Municipal bonds' yields followed treasury yields with a lower slope.
Yields (Figure 1): ? During the past month Treasury yields rose; 2-yearTreasury Note yields -21.9 bps at 1.35%, 5-year Notes yields -34.9 bps at 1.34%, 10-year Notes yields -39.1 bps at 1.53% and 30-year bonds yields -38.3 bps at 2.01%. ? Bloomberg Municipal Index yields fell; AAA-rated GO yields 2-year bonds -24 bps to 0.81%, 5-year bonds 28 bps at 0.85%, 10-year bond yields -30 bps to 1.18% and 30-year bonds were -32 bps at 1.83%. ? The 10yr AAA GO Ratio: 75.2.
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Muni Fortnightly, continued
Figure 1 ? Month-to-date Yield Curve and Muni Curve Changes ? Data Source: Bloomberg
One can observe these changes by looking at how rates have changed along the curve for both the Treasury curve and for the AAA-rated G.O. Index since last week. The top panel shows four yield curves; two for the Treasury curve one for the most current date and one from last week and two for the AAA-rated G.O. - current and last week. The bottom panel of the graph shows changes in the rates along both curves for the week for both Treasuries and the AAA G.O. Index.
Figure 2a - Muni Ratio ? Data Source: Bloomberg
AAA 10-Year G.O. Muni Ratio to Treasury
95.0
90.0
85.0
80.0
75.0
75.2
70.0
Ratio (%)
Mid Price
SMAVG (50)
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Muni Fortnightly, continued
Figure 2b - Muni Ratios Across the Curve ? Data Source: Bloomberg
Supply (Figure 3) ? Bloomberg 30-Day Visible Supply currently stands at $13.6 billion up from $10.0 billion this time last week. The YTD average visible supply is $12.9 billion and the 12-mo average is $12.2 billion.
Figure 3- Bloomberg 30-Day Visible Supply - 1 Year; Data Source: Bloomberg
Bloomberg 30-Day Visible Supply
U.S. Total
30,000 25,000 20,000 15,000 10,000
5,000 0
$ Million
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Muni Fortnightly, continued
Articles of Interest
Muni Fund Flows: According to Refinitiv Lipper muni funds had a 56th consecutive week of net inflows. Net
inflows amounted to $1.8 billion of net inflows. The four-week moving average is $2.3 billion. Both ETFs and highyield funds experienced net inflows.
Puerto Rico o PREPA (Bloomberg Brief): Puerto Rico lawmakers rejected the Puerto Rico Electric Power Authority (PREPA)
debt restructuring proposal. A March 31st hearing on the plan has been delayed. o The S&P Municipal Bond Puerto Rico Index finished at 216.0 vs. 207.6 at the end 2019, +4.03%.
S&P Municipal Bond Puerto Rico Index Level (1-year)
Robert W. Baird & Co. Incorporated
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Muni Fortnightly, continued
Relative Value by Maturity
Table 1 - AAA Muni Ratios and Spreads by Maturity - Data Source: Bloomberg
1/31/2020
Maturity (yrs.)
1 2 3 4 5 7 10 15 20 25 30
Yield-to-worst (%)
AAA Gen. Oblig.
Treasury
0.82
1.45
0.82
1.36
0.82
1.33
0.83
1.34
0.86
1.35
0.96
1.45
1.19
1.53
1.48
1.71
1.62
1.83
1.77
1.92
1.84
2.01
0% Tax Rate
Spread (bps)
Ratio (%)
-62.6
56.7
-53.8
60.4
-51.4
61.5
-51.2
61.8
-49.4
63.4
-48.9
66.3
-34.2
77.7
-22.9
86.6
-20.9
88.6
-14.9
92.3
-16.7
91.7
35% Tax Equivalent
Spread (bps)
Ratio (%)
-18.5
87.2
-9.6
92.9
-7.1
94.6
-6.6
95.1
-3.4
97.5
2.8
101.9
30.0
119.5
56.9
133.3
66.4
136.3
80.5
141.9
82.5
141.0
Figure 4 ? AAA General Obligation Ratios and Spreads ? Data Source: Bloomberg
Ratio % Spread (bps)
95.00 90.00 85.00 80.00 75.00 70.00 65.00 60.00 55.00
1
AAA G.O. Muni Ratio and Spreads
(0% Tax Convention)
3
5
10
20
Maturity (yrs.)
0.0 -10.0 -20.0 -30.0 -40.0 -50.0 -60.0 -70.0
30
Ratio (%) (Left)
Spread (bps) Right
Robert W. Baird & Co. Incorporated
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