Municipal Market Performance (total return basis) – Source: CreditSights as of 3/31/2021
ICE BofAML Muni Index (U0A0): March returns of 0.61%, YTD returns of -0.35%
Ice BofAML Taxable Muni Index (DQTM): March returns of -2.23%, YTD returns of -4.28%
Muni Spreads and Yields – Source: CreditSights, as of 4/6/2021
With the passage of the American Recovery Plan and the promise of aid for states and other municipalities, credit and sector spreads mostly tightened during March, though we believe there is room for further compression
Triple-B index tightened 7 bp, bringing YTD move to 36 bp while the High Yield Index came in by 3 bp with a YTD shift of 53 bp. Still believe the High Yield Index has further room to tighten
Spreads for Airport and Hospital Indices both tightened by 2 bp in March, with YTD narrowing of 19 bp and 11 bp, respectively. Airport Index is 23 bp wider than end of 2019, Hospital Index is 22 bp wider
Among sector indices, Multi-Family, Higher Education and Hospitals had best returns for March, but for the year only the Transportation and Airport Indices have positive returns
Effective yield for Muni index rallied from 1.63% at end of February to 1.58% at end of March, though yield is still higher than it was at the end of last year (1.53%)
Credit ratings for bonds in muni bond indices (IG and HY) were fairly stable during the Q1, with exception of the Port Authority of NY & NJ which was downgraded by Fitch on Jan 19th from AA- to A+
Muni Demand and Supply – Source: CreditSights, Bloomberg as of 4/1/2021
Pace of new issuance picked up, with percentage of muni supply being sold as taxable declining slightly in March
Muni demand is continuing to be fed by the flow of new money into mutual funds and ETFs
While the pace of inflows slowed down in March, muni mutual funds and ETFs pulled in a combined $5.6bn during the month and have added $29.3bn YTD
Continued absence of insurance companies, banks, and other corporate investors means liquidity in tax-exempt muni market continues to rely primarily on demand from individual investors
If individual demand stagnates or reverses, muni prices could experience a significant fall before tax-exempt yields become attractive to crossover investors
YTD issuance of taxable munis totals $27.1bn (25% of muni volume), down slightly from last year’s 31% of volume
2021 Muni Outlook – Source: CreditSights, as of 4/6/2021
Balance between supply and demand likely to shift in the coming months as April new issue supply is typically lower than March’s before picking up in May
Currently estimate May redemptions of $23.5bn, with June redemptions forecasted to be the heaviest of the year at $41.4bn
3-month total for Summer Redemption Season (June, July, August) stands at an estimated $114bn
Coupon payments also expected to peak in June with issuers paying out $14.2bn in interest, bringing total amount of reinvestment flows to $55.6bn during the month
The continuation of demand through muni funds and ETFs, combined with the reinvestment demand in the coming months could compound the downward pressure on yields
While President Biden’s unofficial plan to increase the federal corporate income tax rate from 21% to 28% could stimulate corporate demand for muni bonds, based on current market conditions there is no expectation that the plan would have a significant impact on bank and insurance company demand
Disclosures
Anfield Capital Management, LLC is a registered investment adviser with the SEC. This report is for informational purposes only and does not constitute advice, an offer to sell, or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities. The contents of this report should not be relied upon in making investment decisions. The information and statistical data contained herein have been obtained from sources that we believe to be reliable but in no way are warranted by us as to accuracy or completeness. The accompanying performance statistics are based upon historical performance and are not indicative of future performance. The types of investments discussed do not represent all the securities purchased, sold, or recommended for clients. While many of the thoughts expressed in this report are stated in a factual manner, the discussion reflects only Anfield Capital’s beliefs about the financial markets in which it invests portfolio assets following the models. The descriptions herein, are in summary form, are incomplete and do not include all the information necessary to evaluate an investment in any model. Any prior investment results or returns are presented for illustrative purposes only and are not indicative of future returns. Investments with Anfield are subject to significant risks, which include, but are not limited to, the risk of loss of principal, lack of diversification, volatility, and market disruptions. Prospective investors are referred to our Form ADV 2A for a more detailed discussion of risk factors, which can be (a) found on the SEC's Investment Adviser Public Disclosure website at: http://adviserinfo.sec.gov, or (b) provided upon request. You should not construe the contents of this report as legal, tax, investment, or other advice. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein by Anfield Capital, its employees and no liability is accepted by such persons for the accuracy of completeness of any such information or opinions. Registration as an investment adviser does not imply a certain level of skill or training and no inference to the contrary should be made.