Municipal Market Performance (total return basis) – Source: CreditSights, Lipper as of 2/28/21
ICE BofAML Muni Index (U0A0): February returns of -1.61%, YTD returns of -0.96%
ICE BofAML Taxable Muni Index (DQTM): February returns of -2.37%, YTD returns of -2.09%
Muni Spreads and Yields – Source: CreditSights, as of 3/3/2021
Muni credit and sector spreads slowly tightened in early February but late month turmoil led to some of these spreads widening, though most ended the month tighter than where they started
Most of the sector spreads maintained their tightening momentum throughout the month, with the exceptions of the Industrial and Tobacco indices that slightly widened
We believe there is still room for some of these spreads to continue to get closer to pre-pandemic levels even though fundamentals have not yet returned to normal
California, Illinois, and New Jersey 10-yr spreads widened during the month, but may get some help from the aid that will be flowing to the states with the recently approved American Rescue Plan of 2021
Due to tight spreads in IG corporate bond market, we expect if tax-exempt munis were to cheapen enough to appeal to corporate investors and demand could be significant
Muni Demand and Supply – Source: CreditSights, as of 3/3/2021
We expect reinvestment demand will be slowing over the next several months as March redemptions will be down $2bn from February and April and May totals will be lower still
We believe demand should accelerate in June when redemptions jump 90% from May’s expected total and issuers will be paying out the largest amount of interest this year
Net flows into muni mutual funds and ETFs were lower last month than in January but were still positive and lifted YTD flows to $24.3bn
In early February, investor demand for munis pushed muni/Treasury yield ratios to record lows
Late month Treasury market turmoil poured into muni market – liquidity dried up and yields went higher
Muni bond mutual fund flows slowed, muni ETFs had the first week of negative flows since end of August
February new issue volume was 17% lower than last February
Tax exempt borrowing was down 22% during the month while taxable issuance down only 3%
We believe supply will continue to tilt more towards taxable bonds this year, resulting in a decline in tax exempt issuance
2021 Muni Outlook – Source: CreditSights
Based on expectations for economic growth and inflation, we anticipate negative price returns this year that will offset most expected income returns, resulting in positive (but muted) total returns for IG and HY muni bond indices
With yields low and the market dependent on demand from individual investors, we forecast increased volatility and the potential headwinds of higher Treasury rates as significant risks to the muni market
American Rescue Plan of 2021 includes provisions to provide nearly $220bn in aid for states, territories, and tribal governments
A portion of the $195bn designated for states and DC will be shared equally while the rest will be allocated based on the share of the population of unemployed persons
Estimated that the largest total amount will go to CA ($25.6bn), TX ($16.4bn), and NY ($12.4bn)
Additional funds designated for territories, elementary and secondary schools, and payments to cities, counties, and local government units
As the plan was signed into law on March 11th, these funds should begin to be paid out before the end of the second quarter, when many states will be closing their fiscal quarters
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.