May 16th, 2016
This week we update a few of our favorite charts dealing with market sentiment, municipal/Treasury ratios, and the Philly Fed Index.
Why Aren’t the Strong Technicals Getting the Muni Market Excited?
Market technical factors are currently very positive: tax time is over, mutual fund flows remain positive, and the annual June/July bond redemption season is approaching quickly. Similar to last year at this time, sentiment remains subdued despite the strong technicals.
An analysis of a weekly survey from Municipal Market Data, shows that sentiment among municipal bond portfolio managers and traders is well below neutral (“0.00” in the chart below):
The data from Municipal Market Data indicate that municipal traders and portfolio managers have been a pessimistic bunch for the last 3 years. Sentiment has been almost constantly negative. The only positive observations were associated with the June/July period during ’13 and ’14, as well as the comparable January redemption period during ’15.
We can speculate that the overhang of the credit situations in Puerto Rico, Chicago and Illinois are playing a role in keeping sentiment subdued.
In addition to credit factors, the current low levels of rates is a likely source of pessimism. Despite (because of?) the over 50bp decline over the last 3 years, many market participants remain bearish on the future path of rates.
The chart below illustrates the degree to which municipal traders and portfolio managers have not been believers in the steady decline in rates. The chart compares the sentiment value for each week to the change in rates over the following four weeks.
Even if we ignore the more extreme data points, which represent the May ’14 Taper Tantrum and the subsequent September ’13 relief rally, it is apparent that the bearish sentiment has not been supported by actual market performance.
If sentiment had been a good predictor of future interest rates, the line fitting the points would slope down from the upper left to the lower right corner of the chart.
Low Ratios may be a Contributor to Muted Sentiment
Frequently when rates are low, high ratios of municipal yields to Treasury yields can generate positive buzz because “munis are cheap”. Currently, when adjusted for the low level of interest rates, municipal yields are low relative to a fit of historical ratios compared to Treasury yields.
We use the Bond Buyer 20-Bond GO index for this analysis because of its long history and relatively consistent calculation methodology. Even after accounting for potential issues related to 20-Bond GO drift vs. MMD and challenges related to current coupon vs. premium coupon, it seems clear that current municipal to Treasury ratios are lower than they have been during other low interest rate periods.
Philly Fed Shows States With a Widening Mix of State Economic Health
After a tweak to its methodology to handling seasonal factors, the Federal Reserve Bank of Philadelphia recently released updated values for its State Coincident Indexes. The index combines several State level employment indicators to produce a measure of State economic health.
The most recent index values show an increasing dispersion of economic growth rates between the strongest and the weakest states. Growth in the index for the top States average 0.9% for the first quarter. For the bottom States, the average growth rate was 0.3%.
By plotting the difference between the dark blue and late blue lines in the chart above, we can observe that the current difference between the top and bottom States is as wide as it has been since June ’10.
We believe that this difference between the top States and bottom States adds one more complication to the Fed’s challenging task of setting monetary policy in this uncertain economic environment.
Employment Markets in Some Oil Patch Counties are Suffering
As we have discussed frequently, the decline in oil prices has lead to weakness in oil patch States. The weakness is especially pronounced in certain counties. Using the DIVER Analytics-Filter Tool to identify counties with large employment declines based on bonds included in the Barclays Municipal Bond Index.
Source: Bureau of Labor Statistics, DIVER Analytics-Filter Tool
Have a great week,
Michael Craft, CFA
Why Aren’t the Strong Technicals Getting the Muni Market Excited?
May 16th, 2016
This week we update a few of our favorite charts dealing with market sentiment, municipal/Treasury ratios, and the Philly Fed Index.
Why Aren’t the Strong Technicals Getting the Muni Market Excited?
Market technical factors are currently very positive: tax time is over, mutual fund flows remain positive, and the annual June/July bond redemption season is approaching quickly. Similar to last year at this time, sentiment remains subdued despite the strong technicals.
An analysis of a weekly survey from Municipal Market Data, shows that sentiment among municipal bond portfolio managers and traders is well below neutral (“0.00” in the chart below):
The data from Municipal Market Data indicate that municipal traders and portfolio managers have been a pessimistic bunch for the last 3 years. Sentiment has been almost constantly negative. The only positive observations were associated with the June/July period during ’13 and ’14, as well as the comparable January redemption period during ’15.
We can speculate that the overhang of the credit situations in Puerto Rico, Chicago and Illinois are playing a role in keeping sentiment subdued.
In addition to credit factors, the current low levels of rates is a likely source of pessimism. Despite (because of?) the over 50bp decline over the last 3 years, many market participants remain bearish on the future path of rates.
The chart below illustrates the degree to which municipal traders and portfolio managers have not been believers in the steady decline in rates. The chart compares the sentiment value for each week to the change in rates over the following four weeks.
Even if we ignore the more extreme data points, which represent the May ’14 Taper Tantrum and the subsequent September ’13 relief rally, it is apparent that the bearish sentiment has not been supported by actual market performance.
If sentiment had been a good predictor of future interest rates, the line fitting the points would slope down from the upper left to the lower right corner of the chart.
Low Ratios may be a Contributor to Muted Sentiment
Frequently when rates are low, high ratios of municipal yields to Treasury yields can generate positive buzz because “munis are cheap”. Currently, when adjusted for the low level of interest rates, municipal yields are low relative to a fit of historical ratios compared to Treasury yields.
We use the Bond Buyer 20-Bond GO index for this analysis because of its long history and relatively consistent calculation methodology. Even after accounting for potential issues related to 20-Bond GO drift vs. MMD and challenges related to current coupon vs. premium coupon, it seems clear that current municipal to Treasury ratios are lower than they have been during other low interest rate periods.
Philly Fed Shows States With a Widening Mix of State Economic Health
After a tweak to its methodology to handling seasonal factors, the Federal Reserve Bank of Philadelphia recently released updated values for its State Coincident Indexes. The index combines several State level employment indicators to produce a measure of State economic health.
The most recent index values show an increasing dispersion of economic growth rates between the strongest and the weakest states. Growth in the index for the top States average 0.9% for the first quarter. For the bottom States, the average growth rate was 0.3%.
By plotting the difference between the dark blue and late blue lines in the chart above, we can observe that the current difference between the top and bottom States is as wide as it has been since June ’10.
We believe that this difference between the top States and bottom States adds one more complication to the Fed’s challenging task of setting monetary policy in this uncertain economic environment.
Employment Markets in Some Oil Patch Counties are Suffering
As we have discussed frequently, the decline in oil prices has lead to weakness in oil patch States. The weakness is especially pronounced in certain counties. Using the DIVER Analytics-Filter Tool to identify counties with large employment declines based on bonds included in the Barclays Municipal Bond Index.
Source: Bureau of Labor Statistics, DIVER Analytics-Filter Tool
Have a great week,
Michael Craft, CFA