Monthly Municipal Market Update, September 2021
September month in review
September was a volatile month for U.S. markets, with notable levels of activity exhibited in both equity and fixed income markets. The largest driver of fixed income market activity in September was the Federal Open Market Committee’s meeting, at which Fed officials indicated a possible near-term start to tapering their asset purchase program, as well as the possibility for rate hikes as soon as the end of 2022.Footnote1 This more hawkish tone, relative to previous messaging, resulted in an increase in Treasury yields. At month end, the 1-, 5-, 10-, and 30-year tenors of the Treasury curve yielded 0.08% (up 1 basis point), 0.99% (up 22 basis points), 1.53% (up 23 basis points), and 2.09% (up 16 basis points), respectively.Footnote2
Municipal bond yields also increased in September across the AAA Municipal Market Data (MMD) yield curve. Yields inside the five-year tenor rose by 5 to 9 basis points (bps), while yields at the five-year tenor and beyond increased by double digits. The greatest increase occurred at the 10-year tenor, which ended September at 1.14%, up 22 bps from the end of August.Footnote3 Municipal bond mutual funds continued to attract investors, adding another four straight weeks of inflows for a total of $4.3 billion in September. This brings the running total to 30 consecutive weeks of inflows. So far this year, municipal bond funds have added $74.3 billion.Footnote4
Municipal issuance in September totaled just $37.1 billion, down 16% from August and down 32% from September 2020 (though it bears noting that issuance in September and October of 2020 was elevated relative to historical means, as issuers rushed to sell debt prior to the U.S. presidential election). Taxable issuance totaled $7.6 billion for September, a 24% decline from August.Footnote5*
- The Federal Open Market Committee (FOMC) signaled two key developments at its September meeting. First, the Fed indicated that it may begin to taper its roughly $120 billion in monthly asset purchases as early as November. Next, it was revealed that half of the Fed’s 18 officials expect interest rate hikes by the end of 2022. At their June meeting, just seven Fed officials indicated expectations for 2022 rate increases, with the majority forecasting hikes to begin in 2023; however, elevated inflation concerns have prompted some Fed officials to speed up their expected timelines.Footnote6
- Against a backdrop of increasing yields, municipal bonds posted a second straight month of negative returns. The Bloomberg Municipal Bond Index returned -0.72%, the Bloomberg High Yield Municipal Bond Index returned -0.65%, and the Bloomberg Taxable Municipal Bond Index returned -1.24% over the month. September’s performance brings year-to-date total returns for the three indices to 0.79%, 6.53%, and 0.50%, respectively.Footnote7
- Taxable-equivalent spreads from AAA municipal bonds to Treasuries increased in September, with the lone exception being at the five-year tenor of the curves.Footnote8**
Secondary market trade activity was nearly flat in September relative to August (595,000 total trades). The third quarter marked the lowest figures of 2021 to date for both total trades (1.76 million) and par traded ($498 billion).Footnote9
Muni technicals in focus: Catapulting Treasury yields break municipal market’s lull
For the municipal market, the first three weeks of September were quiet. The 10-year AAA municipal yield remained anchored, inching only a basis point or two upward, as municipal investors awaited additional market developments before making directional moves.Footnote10 However, the September FOMC meeting catalyzed a jump in Treasury yields during the final week of the month, as investors grappled with hawkish messaging from the Fed, as well as rising inflation expectations largely driven by a surge in global energy prices and persisting supply chain bottlenecks. Near-term volatility stemming from the ongoing pandemic, uncertainty regarding the debt ceiling and fiscal plans, and potential contagion from credit concerns in China also rattled investors.
The 10-year Treasury yield rose 23 bps in September from the prior month-end, while the 10-year AAA municipal yield closed the month 22 bps higher at 1.14%.Footnote11 Given that rising yields dampen prices in the fixed income market, the Bloomberg U.S. Aggregate Bond Index returned -0.87% in September. In conjunction with the broader market, the Bloomberg Municipal Bond Index, Bloomberg High Yield Index, and Bloomberg Taxable Municipal Index posted monthly returns of -0.72%, -0.65%, and -1.24%, respectively.Footnote12
Despite expectations of elevated issuance due to seasonal trends, municipal volume in September was only $36.1 billion, down from last month’s figure.Footnote13 Issuers moderated the pace of new sales largely because of the evolving macroeconomic backdrop and uncertainty surrounding fiscal plans, including the potential inclusion of tax-exempt refundings, the revival of a Build America Bonds (BAB)-like program, and a repeal of the cap on state and local tax (SALT) deductions. While taxable issuance comprised 30% of last September’s total issuance, only 20% of this September’s issuance was taxable – largely attributable to the rise in rates over the month.Footnote14 On the demand front, a robust total of about $4.3 billion was added to municipal funds in September. Of this total, municipal investors contributed roughly $408 million over the last week of the month, the first week of sub-$1 billion inflows for municipal funds since June.Footnote15
In our view, the most meaningful credit-related news for September was the ongoing stability in state credit. This was headlined by California voters’ decision on 14 September to overwhelmingly reject the recall of incumbent Gov. Gavin Newsom. We also observed ongoing strength in revenue collections highlighted by the release of official data showing 0.6% year-over-year growth in 2021 first quarter revenues. In addition, preliminary data showed a robust 65% year-over-year growth in revenues for the second quarter, driven largely by the diminished baseline caused by pandemic-related shutdowns during the second quarter of 2020.Footnote16 The ongoing stability in the sector was further highlighted by states such as Hawaii and Nevada, which received improved outlooks from the rating agencies after being heavily affected by the pandemic’s impact on tourism, and in Nevada’s case gaming.Footnote17
1 Nick Timiraos, “Fed Tees Up Taper and Signals Rate Rises Possible Next Year,” Wall Street Journal, 22 Sep 2021Return to content↩
2 Thomson Reuters TM3 MMD Interactive Data, 30 Sep 2021Return to content↩
3 Ibid Return to content↩
4 Refinitiv Lipper, 29 Sep 2021. Data is inclusive of weekly reporting funds and does not include monthly reporting funds Return to content↩
5 The Bond Buyer: Primary Market Statistics – A Decade of Bond Finance, 30 Sep 2021; Bloomberg, 4 Oct 2021 Return to content↩
6 Nick Timiraos, “Fed Tees Up Taper and Signals Rate Rises Possible Next Year,” Wall Street Journal, 22 Sep 2021 Return to content↩
7 Bloomberg, 30 Sep 2021 Return to content↩
8 Thomson Reuters TM3 MMD Interactive Data, 30 Sep 2021 Return to content↩
9 The Bond Buyer: Secondary Market Data, 4 Oct 2021 Return to content↩
10 Thomson Reuters TM3 MMD Interactive Data, 30 Sep 2021 Return to content↩
11 Ibid Return to content↩
12 Bloomberg, 30 Sep 2021 Return to content↩
13 The Bond Buyer, “Bond Sales (Latest Month)”, 30 Sep 2021. Return to content↩
14 Ibid Return to content↩
15 Refinitiv Lipper, 29 Sep 2021. Data is inclusive of weekly reporting funds and does not include monthly reporting funds Return to content↩
16 Lucy Dadayan,“State Tax and Economic Review,2021 Quarter 1,” Tax Policy Center,8 Sep 2021 a href="" data-target="#fn16-base" class="scrollDown" data-id="footnote">Return to content↩
17 Moody’s revised Hawaii’s outlook to Positive on 9/20/21 and S&P revised its outlook to Stable from Negative on Nevada on 9/22/21 Return to content↩
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