Monthly Municipal Market Update, May 2020


  • Municipal bonds rallied strongly in May, with $2.87 billion flowing into municipal funds. High yield credits were the month’s best performers.
  • New municipal bond issuance was down slightly from April, finishing the month at $28.0 billion.
  • May’s rally was aided by continued support by the Federal Reserve, which laid out additional plans to expand its Municipal Lending Facility throughout May and into early June.
  • While nationwide protests could result in police overtime and increased public safety expenditures, we believe most high quality municipal issuers have the reserves to manage through near-term stress.

Figure 1: Market snapshotImage Pop Up

IMPORTANT NOTICE: Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real-time market developments. All opinions are subject to change without notice.

Month in review

Equities rose modestly in May on signs of economic recovery stemming from the early reopening of cities and states and optimism regarding COVID-19 vaccines in the pipeline. AAA Municipal Market Data (MMD) yields ended May at substantially lower levels than at April month-end. In particular, yields five years and in were down from 70 – 75 basis points (bps) at the end of the month, driving short-term yields close to zero, while yields beyond six years were down between 62 and 65 bps. The 10-year tenor ended the month at 0.84%.1 May total municipal bond issuance of $28.0 billion — approximately $5.3 billion of which was attributable to taxable municipal debt — came in just below April’s final tally of $29.4 billion, marking the second-lowest monthly issuance on the year so far.2

  • The Federal Reserve continued to grow its balance sheet in May, most notably expanding its corporate credit facility via the purchase of corporate bond ETFs. The Fed also laid out additional plans for its forthcoming Municipal Lending Facility, a new emergency lending program for state and local government buyers, which it views as a “backstop, not a first stop” for municipal issuers.3

  • Municipal bond indices were up in May following the biggest muni rally in a decade. The Bloomberg Barclays Municipal Bond Index returned 3.18% and the Bloomberg Barclays High Yield Municipal Bond Index returned 4.08%, bringing year-to-date total return for the two indices to 1.24% and -6.35%, respectively.4

  • Muni/Treasury ratios decreased across the curve in May, most significantly on the short end. Though nearly all tenors of the curve remain above 100%, the one-year ratio ended the month at 65% (down from 476% at the end of April). The two-year ratio ended the month at 100% (down from 479%), the five-year ratio at 127% (down from 321%), the 10-year ratio at 129% (down from 235%), and the 30-year ratio at 116% (down from 180%).5

  • Muni/Treasury taxable-equivalent spreads* also decreased across the curve in May. At month-end, spreads equated to two bps at the one-year tenor, 11 bps at the two-year tenor, 34 bps at the five-year tenor, and 77 bps at the 10-year tenor.6