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Of Interest: The State of the Muni Market

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The equity markets have been getting a lot of attention in the past six months due to increased volatility. The fixed income markets, and particularly municipals have been quite dynamic in the last few quarters.

Rates have dropped even more than Treasury rates as investors wake up to the loss of the state and local tax (SALT) deduction. At the same time, the pace of new issuance is lagging the maturities of old bonds, creating an imbalance of supply and demand. The tax law changes severely curtailed new issuance from refinancing.

Spreads are interesting because investors are reaching for yield, and quality spreads have compressed as choices for investors have become more limited.

Looking ahead, we see a continued supply crunch as muni mutual funds have seen 16 weeks of inflows without the prospect of enough new issues to satisfy the demand. In California alone there is approximately $6 billion of bonds being redeemed and or paying coupon interest in May and only roughly $1.1 billion in new issue supply. This will undoubtedly create a supply shortage for CA paper.

It’s important to be nimble and understand the liquidity of the names you own for the inevitable reversal.

So, it’s important to be nimble and understand the liquidity of the names you own for the inevitable reversal. When it comes, the credits with pension problems will be hard to unload.

  • Many realize that the municipal bond market is large with approximately $3.8 trillion in bonds outstanding. What most don’t realize is how complex the marketplace is, and even in this electronic age of information how little transparency exists. In the United States there are roughly 4,500 listed equities that are traded on various exchanges. In comparison there are approximately 117,000 different issuers of municipal bonds. Coupled with the fact that these issuers have 10-20 individual securities each, this amounts to over 1 million different municipal bonds that could be traded. This is why many advisors steer clients into ETFs and mutual funds, as they simply don’t have the ability to achieve the type of security selection or execution that an active specialist can. In this report we have included many of the charts that graphically demonstrate the unique characteristics of the municipal securities marketplace.
  • Recently we were invited to speak at a forum that was designed as informational and educational without marketing or promoting products. In the exercise of taking a step back and looking at the municipal bond market from a different perspective we discovered many important facts that many investors take for granted or haven’t been exposed to that we have included within this newsletter.

  • Investors should take the opportunity when the market was weaker to rebalance portfolios to maximize income. Borrowing costs are still relatively high and in response we have continued to seek out new issue bonds that represent what we consider excellent value and short-term trading opportunities that require little to no margin interest costs to clients.

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Spinnaker-Report-May-2019 OPT
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