Municipal Summary
Municipals stumbled yesterday on average volume and a weaker Treasury curve. Better ratios heading into the week helped tax-exempts outperform a bit, but benchmark and evaluated yields were still adjusted higher throughout the session. Participants are well aware of the current seasonal support in the market, which often lasts through Labor Day. And there is clearly growing optimism via better supply/demand expectations at ~5.0% taxable equivalents. However, fundamentally, the ongoing conflict with Iran and its effect on oil and inflation, the series of Fed officials scheduled to speak this week on rate policy, the run of jobs data on the calendar, and a growing narrative from the street for more (not less) restrictive monetary policy have all kept participants and investors on edge.
Also, technically, the 30-year Treasury long bond has continued to test 5.0% — a level rejected several times over the current cycle, but one that raises concern for long-term yields if it fails to hold this week (Figure 1 below). Price volatility has come down but remains elevated, institutional demand is still tepid (likely contributing to the building offering par posted on PICK), price momentum is negative and building across the curve, and the equity markets continues to pull retail way from the asset class. Recall that US equities have recovered extremely quickly from their recent -9.0% correction — one of the fastest recoveries on record (Figure 2 below) — which has captured much of the municipal retail investor's attention and distracted from an otherwise compelling case for nominal yields and (to a lesser extent) total return prospects.
Figure 1, munistreet
Figure 2, munistreet
Tripp Kaiser is the founder of munistreet, the 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.