The Week in Muniland

Munis took a breather this week as the curve steepened. Two-year AAA yields were flat, while 20- and 30-year yields were up 2 basis points, respectively. The Bloomberg Municipal Bond Index (the Index) returned –0.09% last week, bringing month-to-date and year-to-date returns to 0.08% and 4.00%, respectively.

• Why it matters: Performance never moves in a straight line. Since August 29, the Index has returned 3.67%. Even more impressive is the fact that the 20-year index returned 6.23% over that time, so a breather was not unexpected. Contributing to this “breather” was a huge new issue calendar totaling $16 billion, which is likely the final gasp of any meaningful issuance through year-end. This week’s new issue calendar will total only $2 billion. Although a short trading week, due to the Thanksgiving holiday, munis should show some stability as a result of positive supply technicals.

November has been a flattish month from a performance perspective although December appears to have a positive tailwind given investor friendly supply/demand technicals.

• Why it matters: The anticipation is that net supply for December will be negative $3 billion, which means there will be $3 billion more in organic demand than new issue supply. J.P. Morgan reports that tax-exempt new issue supply is likely to total $30 billion in December with $33 billion in demand coming from bond coupon payments, maturities and calls. This lack of supply should be a positive tailwind from a performance perspective. Over the past 25 years, December has generally been a favorable moth for investors with the Index returning an average of 0.54%. Over this time period, returns have been as high as 2.48% and as low as –-1.94% with only six instances of December returns being negative. We believe this technical backdrop continues to provide a compelling opportunity for a barbell maturity structure—investors can not only take advantage of attractive relative valuations on both the front- and long-end of the yield curve but also benefit from strong absolute performance from longdated bonds if yields fall (Display 3). And with the likelihood bonds rally in December due to strong technical, longmaturity bonds are likely to continue to outperform short-maturity bonds.

The September employment report, which was originally scheduled to be released more than a month ago, showed a gain of 119K jobs in September, easily beating the consensus forecast.

• Why it matters: The US Bureau of Labor Statistics announced that there will not be a full October payrolls report and that the November report will be delayed until December 16. That means that the Federal Open Market Committee (FOMC) will not have any payrolls data past the September report when it convenes in mid- December. Thus, this report—delayed though it may be—is the last top-tier employment data available to help guide that decision. Chair Powell’s comments after the Fed’s October meeting, Fed speak since that time and the minutes of that meeting have all made clear that the onus is on the data to convince the Fed to cut in December; more members of the committee anticipate staying on hold in December than cutting. Markets are already pricing a very low probability of a December rate cut at this point, and we doubt that September’s data will change that opinion. From a macro perspective, it doesn’t really matter. Almost all members of the FOMC anticipate cutting rates over time, and a rate cut in January instead of December isn’t really economically significant. If they go on a protracted hold that would be more meaningful, but we think that is quite unlikely.