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↩

DISCLOSURES

Past performance is not a guarantee or a reliable indicator of future results.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax; a strategy concentrating in a single or limited number of states is subject to greater risk of adverse economic conditions and regulatory changes. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.

References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included.

The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

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Bloomberg Municipal Bond Index consists of a broad selection of investment-grade general obligation and revenue bonds of maturities ranging from one year to 30 years. It is an unmanaged index representative of the tax-exempt bond market. The index is made up of all investment grade municipal bonds issued after 12/31/90 having a remaining maturity of at least one year. The Bloomberg High Yield Municipal Bond Index measures the non-investment grade and non-rated U.S. tax-exempt bond market. It is an unmanaged index made up of dollar-denominated, fixed-rate municipal securities that are rated Ba1/BB+/BB+ or below or non-rated and that meet specified maturity, liquidity, and quality requirements. The Bloomberg Taxable Municipal Index represents a rules-based, market-value weighted index engineered for the long-term taxable bond market. For inclusion in the Index, bonds must be rated investment grade quality or better, have at least one year to maturity, have a coupon that is fixed rate, have an outstanding par value of at least $7 million, and be issued as part of a transaction of at least $75 million. The Intermediate Municipal subsector groups together securities with an average maturity between one to 10 years. The Bloomberg 1-10 Year Municipal Bond Index is an unmanaged index considered to be generally representative of investment-grade municipal issues having remaining maturities from 1-10 years and a national scope. It is not possible to invest directly in an unmanaged index.

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