Current Market
Since the start of the year, Treasury and muni yields have seen an increase in yield. The ten-year Treasury has increased 29 basis points as of Friday’s close, while the muni ten-year has increased 52 basis points closing at a 1.55% yield. This has been a considerable move for the muni market that has been outperforming taxable counterparts until the muni funds started to see outflows. According to Lipper combined flows in the all-muni category flipped to a negative $1.1 billion. This is a new day for the muni market, which saw muni bond funds inflows in 85 of the past 86 weeks. Lipper reported full year 2021 flows (ending December 29th) of $101.7 billion, the highest since the inception of the data in 1992.
Source: Lipper Data.
Muni fund flows starting negative for 2022 has prompted sustained and elevated bid wanteds. This has pushed 10-year and 30-year muni yields to the highest % of Treasuries in over 12 months. The chart below shows the current percentage vs the Treasury counterpart.
Source: Municipal Market Data, US Treasury.
“This has been a considerable move for the muni market that has been outperforming taxable counterparts until the muni funds started to see outflows.”
— KEVIN WOODS
Tax-free Value
The question of the moment is how long fund flows will continue to be pressured? We feel that we will see some continued redemptions from funds, which should cause market volatility. With this said, we feel that the muni market is offering value for individual investors, banks, and insurance investors. The below chart shows the taxable equivalent yield (TEY) on municipal bonds based on the highest individual tax bracket. The tax equivalent yield of munis is now higher than similar taxable munis and corporates yields across the curve.
Source: Data from Municipal Market Data used for calculations for table above; 40.8% Tax Rate used for calculations.
APA is more positive on municipal value today than we have been over the past 12 months.
Disclosures:
Past performance is not indicative of future results. Investing involves risk including the potential loss of principal. This material is not financial advice, or an offer to sell any product. This is not a recommendation to buy or sell a particular security. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable, or will equal the investment performance of the securities discussed herein.
APA is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about the advisor including its investment strategies and objectives can be obtained by visiting www.assetpreservationadvisors.com. A complete description of APA’s fee schedule can be found in Part 2 of its FORM-ADV which is available at www.assetpreservationadvisors.com or by calling (404) 261-1333.
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