The January Effect and a Strong Start for Munis

New York - In January, the fourth quarter moved into the rear view mirror. Market participants felt a collective sense of relief.

Municipal bonds, however, were the beneficiary of the uncertainty as interest rates fell while investors sought safety. Absent too was any major legislation for market participants to consider.

For municipals, January played out as typically expected with strong demand and lackluster new issue supply. This formula (known as the January effect) was supportive of valuations and the Bloomberg/Barclays Municipal Bond Index returned 0.76% for the month, the best January return for municipals since 2016.

There are a few clouds of uncertainty on the horizon including Brexit, China's growth outlook and ongoing domestic policy wrangling. We remain focused however on U.S. growth as we are closing in on the longest expansion on record.

Supply and demand in munis

Looking at the supply/demand picture in the muni market, while January 2019 experienced slightly higher supply than January 2018, the loss of advanced refundings continued to weigh on new issue supply in the market.

New issue supply in January was $24.1 billion, which was 12% higher than January 2018 issuance, but still 15% lower than the monthly average over last year. Net issuance came to -$1 billion. February gross issuance is expected to be approximately $26 billion and net issuance is expected to be -$4 billion.

We continue to expect a supportive technical environment.