Download Munis and the Markets

Municipal Monthly
March 2017
Munis and the Markets
• Municipals have posted solid
results so far this year. Even so,
PIMCO sees more attractive
relative valuations in the muni
market than we did just a few
months ago, as we see some of
the policy uncertainty in the
muni market receding.
• Across portfolios, we continue to
emphasize revenue-backed
sectors over general obligation
debt which may be more subject
to pensions and politics.
MONTH IN REVIEW
• Municipals posted positive returns in March, notching a fourth consecutive
monthly gain as they continued to make up ground lost during the post-election
sell-off. The Bloomberg Barclays Municipal Bond Index returned 0.22%, bringing
its year-to-date return to 1.58%.
• The Federal Reserve raised its benchmark lending rate for a third time since
moving off the zero lower bound in December 2015. The market largely took the
well-telegraphed rate hike in stride. Muni front-end rates moved slightly higher
while long-end rates were relatively steady, leading intermediate and longer
duration municipals to outperform.
• Flows into municipal mutual funds remained positive while new issue supply
picked up modestly. Year-to-date issuance of $88 billion was down 11% on a
year-over-year basis versus the first quarter of 2016, as refunding activity fell.
• Hospital bonds outperformed as congressional attempts to repeal the Affordable
Care Act (ACA) failed. Many healthcare systems have benefited from a lower
number of uninsured patients under the ACA, which has subsequently lowered
bad debt and charity care expenses.
• The Bloomberg Barclays High Yield Municipal Bond Index’s monthly return of
0.23% belied significant dispersion within the underlying sectors. High yield
tobacco debt outperformed. A large refunding of California’s “Golden State”
tobacco bonds boosted prices, as these bonds were called at par after previously
trading at a discount. Conversely, Puerto Rico was the weakest segment of the
muni market. The island’s federal oversight board approved the governor’s fiscal
plan, which outlined deep haircuts for bondholders. The plan allocates
approximately $780 million annually for debt service, a fraction of the more than
$3 billion owed each year. The island’s general obligation securities fell to record
lows following the plan’s approval on March 13th.
MARKET SNAPSHOT
Yield-toWorst
MTD
Return
YTD
Return
Muni Yields
Yield
MTD
Change
YTD
Change
Bloomberg Barclays Muni Index
2.37
0.22%
1.58%
MMD AAA 2-Year
1.02
0.06
High Yield Municipal Index
5.86
0.23%
4.06%
5-Year
1.55
California Municipal Index
2.22
0.19%
1.57%
10-Year
New York Municipal Index
2.16
0.24%
1.48%
30-Year
Muni Returns
Treasury Yields
Yield
MTD
Change
YTD
Change
-0.19
US Treasury 2-Year
1.25
-0.01
0.07
0.05
-0.24
5-Year
1.92
-0.01
-0.01
2.25
-0.04
-0.06
10-Year
2.39
0.00
-0.06
3.05
0.00
0.01
30-Year
3.01
0.01
-0.06
MUNI
MUNI
YTD IG
YTD HY
$88 bn YTD
+$1.1 bn YTD
-6 bps
ISSUANCE
FUND FLOWS +1.58% RETURN +4.06% RETURN
Source: Returns: Bloomberg Barclays indices, Yields: Thomson Reuters Municipal Market Data (MMD), Federal Reserve. Supply: Barclays, Flows: EPFR
YTD CHANGE IN
10YR MUNI YIELD
Munis and the Markets | March 2017
CREDIT IN FOCUS: Sanctuary Cities
SECTOR RETURNS
Select Sectors
• In January, President Trump signed an executive order entitled
“Enhancing Public Safety in the Interior of the United States” that
threatened to cut off levels of federal funding to jurisdictions that
do not enforce federal immigration laws. Since then, municipal
investors have questioned what this order means for so-called
“sanctuary cities” and states, many of which are large muni market
issuers.
• The executive order and the subsequent opposition response from
several major city mayors has created headlines, but PIMCO
believes that the muni market has correctly downplayed the issue
so far. To be sure, federal funding represents a sizeable portion of
many municipal budgets; most major U.S. cities receive 8-12% of
annual revenue from the federal government. However, we believe
that the amount of federal aid that can be impacted by this order
is limited by legal precedent and congressional budget laws.
Additionally, most major U.S. cities have the budget flexibility to
offset the impact of potential funding cuts.
Munis cheap
2016
General Obligation
0.26%
1.63%
-0.23%
-0.05%
1.00%
-0.01%
Revenue
0.23%
1.63%
0.43%
Education
0.27%
1.63%
0.00%
Healthcare
0.29%
1.70%
0.45%
Industrial Development
0.44%
1.83%
0.93%
Lease-Backed
0.22%
1.82%
0.40%
Power
-0.07%
1.31%
0.44%
Special Tax
0.14%
1.42%
0.38%
Transportation
0.31%
1.75%
0.60%
Water & Sewer
0.20%
1.48%
0.34%
HY Tobacco
2.05%
13.12%
4.44%
HY Puerto Rico
-5.55%
-0.72%
11.40%
Source: Bloomberg Barclays indices
MUNICIPAL MARKET ISSUANCE
10yr ratio
10yr avg.
130%
YTD
Pre-Refunded
MUNICIPAL/TREASURY YIELD RATIO
140%
Mar '17
Monthly Supply
30yr ratio
30yr avg.
120%
$50
110%
$40
Billions
100%
90%
New Capital
$60
Refunding
$31.3
$30
$20
Munis rich
80%
$10
70%
$-
60%
'12
'13
'14
'15
'16
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
'16
'17
'17
Source: Thomson Reuters Municipal Market Data (MMD) AAA yields, Federal Reserve
Source: Barclays
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PIMCO Muni Highlights
19
Years
Managing
municipal assets
$38
Bn
AUM as of
31 Mar ‘17
For more information, visit pimco.com/munis
17
Team
members
50+
Firm-wide
credit analysts
11
Mutual funds
and ETFs
Munis and the Markets | March 2017
Past performance is not indicative of future results.
A Word About Risk: 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 the current low interest rate
environment increases this risk. Current 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 may be subject to
state and local taxes and at times the alternative minimum tax.
The Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long term tax-exempt bond market.
The Barclays High Yield Index is an unmanaged market-weighted index including only SEC registered and 144(a) securities with fixed (non-variable)
coupons. The Barclays High Yield Municipal Bond Index is a rules-based, market-value-weighted index that measures the non-investment grade and
non-rated U.S. tax-exempt bond market. It is not possible to invest directly in an unmanaged index.
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 suitable 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.
PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.
The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or
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counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance
arrangement.
PMUNIMA03_49193
CMR2017-0417-263117
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