skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

MARKETS
October 13, 2020

Weekly Municipal Monitor—Growing Global Interest

By Robert E. Amodeo, Sam Weitzman
Download the Article

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Municipals Post a Second Consecutive Week of Negative Returns

Municipals posted negative returns as yields moved higher in sympathy with Treasuries. AAA municipal yields increased approximately 3-10 bps across the curve, following Treasuries higher. The Bloomberg Barclays Municipal Index returned -0.33%, while the HY Muni Index returned -0.18%. This week we explore growing global interest for taxable municipals.

Municipal Mutual Fund Inflows Turn Positive

Fund Flows: During the week ending October 7, municipal mutual funds recorded $1.7 billion of net inflows, concentrated in long-term and high-yield fund complexes, according to Lipper. Long-term funds recorded $840 million of inflows, intermediate funds recorded $61 million of inflows and high-yield funds recorded $349 million of inflows. Municipal mutual fund net inflows YTD total $23.7 billion.

Supply: The muni market recorded $16.1 billion of new-issue volume last week, up 40% from the prior week and marking the largest week of new-issuance this year. Issuance of $363 billion YTD is 29% above last year’s pace. Taxable municipal issuance remains over three times higher year-over-year while tax-exempt issuance is relatively unchanged. We anticipate another heavy week of issuance this week with approximately $14 billion of scheduled new-issue volume. The largest deals include $3.2 billion California Infrastructure and Economic Development Authority/Nevada Department of Business (Brightline West) along with $1.5 billion Alabama Public School and College Authority transactions.

This Week in Munis: Growing Global Interest

Demand for long duration, high quality taxable assets has more than offset the deluge of taxable municipal supply observed this year. As of October 9, the Bloomberg Barclays Taxable Municipal Index performance has posted favorable returns of 8.06%, outperforming the Bloomberg Barclays Aggregate of 6.55% and the Bloomberg Barclay’s Tax-Exempt Municipal Index return of 2.90%.

A primary source of this demand derives from growing global interest in municipal securities. In a world of low-to-negative yields for high quality government issues, paired with declining hedging costs for US-domiciled debt, the relative value for high quality tax-exempt municipals has increased for global investors. According to the September 2020 Federal Reserve Financial Accounts Report, non-domestic holders of municipal securities increased $4.4 billion, or 4.2%, in 2Q20, to $107 billion, as global investors sought value in taxable municipal debt versus other longer duration high quality global fixed-income assets.

We expect increasing global interest in taxable municipal debt to persist for three primary reasons:

  1. The liquidity features and structural considerations of taxable municipals can offer better risk-adjusted spread and diversification opportunities versus similar quality corporate and governmental assets.

  2. This risk-adjusted value proposition can strengthen for global banks and insurance companies, which could benefit from favorable regulatory treatment and capital charge benefits associated with infrastructure and sub-sovereign investments.

  3. Finally, as global interest in ESG investments continues to intensify, we expect an increased international recognition of the environmental and social benefits municipal bonds have long provided. Just last week, The Public Utilities Commission of the City and County of San Francisco listed the first taxable municipal bond to be included on the London Stock Exchange. The bonds were labeled as Green Bonds for the refinancing of previously issued bonds that had been sold to promote projects related to drought mitigation efforts and environmental initiatives.

As the US continues to see stubbornly high unemployment and is facing another potential prolonged economic recovery, we believe infrastructure investment—partially supported by taxable municipal debt—can meet growing domestic investment needs while fulfilling growing foreign appetite for long duration, high quality income.

Exhibit 1: Foreign Holders of US Municipal Debt
Explore Foreign Holders of US Municipal Debt.
Source: Federal Reserve. As of 30 Sep 20. Select the image to expand the view.
Exhibit 2: Municipal Bond Yields and Index Returns
Explore Municipal Bond Yields and Index Returns.
Sources: (A) Muni yields: Thomson Reuters MMD; Treasury Yields: Bloomberg. As of 9 Oct 20.
(B) Bloomberg. As of 9 Oct 20. Select the image to expand the view.
Exhibit 3: Tax-Exempt and Taxable Municipal Valuations
Explore Tax-Exempt and Taxable Municipal Valuations.
Sources: (A) Bloomberg, Western Asset. AAA, AA, A, BBB Corporate Indices. After-tax yield assumes a top effective tax rate of 40.8%. As of 2 Oct 20.
(B) Bloomberg, Western Asset; Taxable Muni Index Corporate comparable used is the long corporate (ex. BBB) to better align credit quality and duration. As of 2 Oct 20. Select the image to expand the view.
© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.