The intensity of outflows from muni-bond funds waned as muni prices remained low and investors once again looked for value. Unprecedented federal aid through the CARES Act and the creation of the Municipal Liquidity Facility helped lure weary investors back into munis and repair the market’s historic dislocation. In April 2020, some stability returned to the market. As muni investors fled in March 2020, the M/T ratio spiked across the muni yield curve, and according to Thomson Reuters TM3 Interactive Data, the five-year ratio ended the month at nearly 295% and the 10-year ratio at roughly 200% (both up from about 80% at the end of February). The M/T ratio historically hovers near 80% to 90%, with anything over 100% suggesting that munis are a good deal, as they’re yielding more than a comparable U.S. Treasury yields to guide investors toward investment opportunities. The turbulence was clear in the shifts of the muni-Treasury, or M/T, ratio, which compares muni-bond and U.S. Funds that focused on higher-quality offerings and that generally take less interest-rate risk fared better: The median loss for a distinct group in the muni national intermediate Morningstar Category was 9.2% from Feb. 2020, through March 23, 2020, and losses reached closer to 20% for some of the most aggressive in the category. The median loss for a distinct group of funds in the high-yield muni cohort was 14.4% from Feb 20. The riskier, low-quality fare that drove robust returns in 2019 got stung in early 2020, and funds that loaded up on some of the market’s riskier names and leveraged structures suffered deep losses. While few muni market segments remained unscathed through the volatility of early 2020, nearly a fourth of those outflows came from the high-yield muni-bond Morningstar Category. Investors pulled a record $45 billion from muni funds in March 2020 (equivalent to four months of inflows from November 2019 through February 2020), resulting in the worst-ever organic growth rate of negative 4.9% for municipal-bond open-end funds and ETFs. A significant portion of the assets that had surged into municipal-bond funds took a little over two weeks to vanish and with them went a year’s worth of gains. That insatiable appetite evaporated as the coronavirus pandemic market sell-off got underway in late February 2020 and quickly spread beyond equities to the fixed-income universe. economic growth supporting strong credit fundamentals and low muni default rates. The ardent demand for municipal fare was fueled by several factors including solid U.S. That amount towered over the annual gains the muni sector saw in each of the past 25 years, including the group’s previous boom year of 2009, which brought roughly $75 billion into muni strategies. Investors poured a massive net $105.5 billion into muni open-end mutual funds and exchange-traded funds from the start of 2019 and through the first two months of 2020. muni-bond funds and pushing extremely low yields even lower. Munis soared through 2019 and into 2020, attracting record inflows into U.S. While it feels like a lifetime has passed, it was less than 18 months ago that we were watching historic demand for munis take flight. Individual retail investors and portfolio managers are now focused on what comes next in the municipal space, but it’s worth taking a look back at this turbulent year to understand how the sector has evolved. The trend back into the sector started in earnest midyear as investors dipped their toes back into the muni pool and has since become an all-out pool party complete with cannonballs into the deep end. Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.Īfter a tumultuous start to 2020 in the municipal markets, investors have returned to the asset class in droves.
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