A Sentiment Measure Shows Municipal Market Undaunted by Challenges

August 10, 2015

This week we look at a measure of municipal market sentiment and check in on export data to examine the impact of a strong dollar and weak energy prices.

Puerto Rico Headline Risk, Mutual Fund Out Flows, Rate Rise Fears: Munis Say “Meh”

While there are currently many reasons for municipal bond investors to fret, one measure of market sentiment is showing a high level of complacency. Each week Municipal Market Data polls a mix of traders and portfolio managers to gauge their feelings regarding the future performance of the muni market.

Municipal Market Data’s survey reports percentages of participants who are bearish, neutral or bullish.  To gauge the changes over time, we have converted these responses to -1 to +1 scale:  -1 is totally bearish, +1 is totally bullish and 0 is neutral.

Since January 2013, this sentiment measure has averaged a slightly bearish -0.2.  It is not clear if this negative reading is due to a general level of pessimism of muni participants or the chronic fear in recent years of an increase in rates in all fixed income markets, or muni specific issues.

In the last few months, the municipal market has been facing numerous issues which in worst case scenarios could cause significant challenges:  headline risk from Puerto Rico (and potentially Illinois, Chicago or New Jersey); regular, if small, outflows from mutual funds, and a heavily-marketed drumbeat for individuals to shelter portfolios from what is billed as a near-certain increase in long term interest rates.

Despite these issues, according to this measure, over recent months muni sentiment has been hovering around average levels.  Week to week developments aside, sentiment in the municipal market tends to be very seasonal. The positive market technicals due to a high concentration of maturities and coupon payments in January and July are widely touted and anticipated.

Peaks in the MMD sentiment measure in June ’13, June ’14, and December ’14 track to this expected behavior.  December ’13 and July ’15 showed surprisingly subdued sentiment.

Recent troughs in MMD sentiment have likely been attributable to the “taper tantrum”, negative developments in Puerto Rico, “risk-off” episodes tied to international developments, and most recently the City of Chicago’s credit issues.

As measured by the MMD survey sentiment in the muni market has been remarkably stable if we exclude the December/July seasonals:  between August ’14 and March ’15 sentiment measured slightly below average  -0.4.  Since April ’15, sentiment has been  -0.2 (equal to the average since January ’13).


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While we believe this sentiment data is a helpful and interesting measure of current muni market psychology, we do not believe it can identify tradable, potentially profitable opportunities.  It is more of a lagging indicator than a leading indicator.

Since January ’13 this sentiment measure has not demonstrated any predictive ability for the direction of future municipal interest rates.  The chart below plots the sentiment measure (x-axis) vs. the subsequent change in municipal bond rates  (BBuyer GO 11 Index) over the following four weeks.

The relationship between sentiment and future market performance has been weak.


The correlation between the sentiment measure and the path of interest rates over the following four weeks was weak. The market sentiment has been most highly correlated with interest rate changes during the previous week. Looking one week forward showed the next highest correlation.

The sentiment measure performed dramatically poorly during several periods: the May 2013 Taper Tantrum and the September 2013 relief rally (data points highlighted in dark blue in the chart above).

US Exports Weakened By Weak Energy and Strong Dollar

The ambiguous impacts of weak energy prices and a strong dollar on the U.S. economy complicate the Federal Reserve’s decision on when and how aggressively to begin “lift-off”.

Each of these factors has both positive and negative consequences.  Weak energy prices provide a potential lift to the economy by reducing costs of production for businesses and reducing expenses for consumers.  This potential positive impact is somewhat offset by the negative impact to the economies of oil producing/exporting States which will see reduced revenues.  The strong dollar will potentially benefit the U.S. economy, by helping to dampen inflation pressures. The offset to the benefit of a strong dollar is the lower competitiveness of U.S. exports.

The year over year change is U.S. exports (measured in dollars) has been declining steadily all year.  While some initially attributed this decline to strikes at the West Coast ports, is now is clear that other factors are having an effect.


Total U.S. exports in June ‘15 were -5.3% lower than June ’14. Demonstrating the impact of lower energy prices, Texas (-10.4%) and Louisiana (-22.6%) were the largest contributors to the national decline.  Because of its size California (-1.0%) was also a large contributor.


From a municipal market perspective, the implications of weak energy and a strong dollar are important, because the negative and positive impacts are not evenly distributed across the States. The positive impacts are diffused across the country, while the negative impacts are concentrated in energy producing/refining States and export-dependent States.

Plotting export dependency (exports as % of GDP) vs. the year over year change in dollar volume of exports we can see which States are likely to suffer the worst from declining exports.  Texas, Louisiana, and Puerto Rico all stand out as particularly exposed.  While Washington has a large exposure to exports, its level of exports has been stable.


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New Mexico, Utah and Nevada are notable because of their increases in exports.  Export data for these states tends to be noisy, so it’s best not to read too much from these outliers.


Have a great week,

Michael Craft, CFA