Municipal Summary
Financial markets breathed a bit of relief yesterday following some better headlines out of Iran. US equity and Treasury prices bounced higher (maintaining their tighter correlation) while oil drifted back below $100/barrel. Municipals also improved: afternoon trading showed blocks printing 1-4 bps through Tuesday's levels, MUB closed the session +0.25% higher, secondary flows were +3.0% above average, the primary calendar was active and reported as well-received, and there was no evidence of heavy selling pressure that would otherwise overwhelm street distribution or dealer balances. In fact, municipal ETFs have continued to grow AUM through the week, and ICI reported another $1.9B inflow into tax-exempt mutual funds for the week ended May 13. High-grade benchmark yields were also adjusted lower, although the volatility, price action and outperformance leading into the week reasonably kept final reads within 0-1 bps. Nonetheless, it was a positive session during an otherwise very challenging week, providing some encouragement for retail and institutional accounts looking at better income and total return opportunities heading into the summer.
However, it is still important to note: 1) municipal price momentum is far from positive, 2) Treasury 10yr and 30yr technical support levels of 4.50% and 5.00%, respectively, are still broken, 3) fundamental headlines remain fluid, meaning conditions can change quickly day-to-day with daily price volatility for both taxable and tax-exempt rate markets apt to remain high (Figures 1 & 2), and 4) yesterday's session for municipals was not a true bounce off an oversold condition (as measured by current vs. rolling 30-day index prices, Figure 3) but rather a day of stability supported by a fundamental cushion and strong Treasury bid. So there is still great uncertainty to contend with, and conviction for a strong summer seasonal period is unlikely to meaningfully improve until the underlying trend turns positive – which, through yesterday, it has not.
Figure 1, Munistreet Research
Figure 2, Munistreet Research
Figure 3, Munistreet Research
Tripp Kaiser, CFA, is the founder of MUNISTREET, Executive Director of the Center on Municipal Capital Markets, and a professor of practice at the LBJ School of Public Affairs at the University of Texas at Austin.