The municipal bond market saw interest rates back up very slightly in sympathy with the Treasury market during the fourth quarter of 2019.
Ten- and thirty-year AAA tax-free yields started the quarter at 1.42% and 2.01% respectively. As the curtain dropped on 2019 they closed at 1.44% and 2.09%. However the ratio to Treasury yields fell, with the ten- and thirty-year muni/Treasury yield ratios starting the quarter at 85% and 95% respectively and ending the quarter at 76% and 88%. This reflected ongoing demand for tax-free bonds in the wake of the 2017 tax bill, which eliminated deductions for state taxes and local property taxes.
Muni bond supply ended the year at approximately $400 billion. This was higher than we projected at the start of the year. Though tax-free advance refundings are significantly reduced because of the 2017 tax bill, municipalities decided to sell new issues to take advantage of the very low interest rates we witnessed this summer, with thirty-year AAA yields hitting 2% as thirty-year Treasuries also went briefly below 2% yields. Taxable refundings also picked up significantly when Treasury yields fell. This meant that taxable muni rates were still lower than the original tax-free yield on bonds that were being refunded.
The first quarter of 2020 should see the trend of higher supply being met by demand, particularly the ongoing demand for tax-free bonds in high-tax states such as California and New York.
See John talk about the year 2019 in bonds at the link or in the player below: The Year 2019 in Bonds recapped by John Mousseau
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