Last week being a holiday season, U.S. Treasury yields rose with good momentum whereas muni bonds remained mostly unchanged. This article provides information regarding the performance of muni bonds for the past week in comparison with Treasury yields as well as details regarding the net inflow in the muni market. There was a notable upgrade in San Jose Unified School District’s outstanding general obligation (GO) bonds by Moody’s, the details of which are provided below. Also, we provide a quick outlook on Puerto Rico’s debt payments.
Full Week Bond Market Summary for December 28-31
- Treasury yields rose slightly last week.
- The market is not expecting another immediate Fed rate hike during the January meeting.
- Municipal bond performance was light overall light last week.
- High-yield muni bonds declined and had a bit of momentum.
- $330 million in GO debt service payments were made by Puerto Rico on January 1, 2016.
Detailed Report
- Even though it was a holiday-shortened week, U.S. Treasury yields rose across all maturities. The rise was more prominent in 30-year and 2-year Treasuries. A more aggressive outlook for Fed policy likely affected shorter maturities.
- The market does not expect another immediate Fed rate hike in January, but there will be a gradual rise as per the forecasts.
- The municipal bond market remained unchanged last week. There was much less activity due to the holiday season. New issuances were almost zero, while fund inflows were approximately $1.3 billion. The year begins with a new issuance calendar of $3.2 billion this week.
- $300 million were invested last week into high-yield funds, the largest influx in several months. This was the major reason that high-yield muni bonds had momentum in the year-end season. A total of $2.9 billion were invested last year.
- A $330 million GO debt service payment was made by Puerto Rico on January 1, 2016, using redirected revenue sources. The territory tapped into a debt service reserve fund to make payments on Highway Authority and Convention Center bonds.
Moody’s Upgrade/Downgrade Ratio
Upgrades:
San Jose Unified School District’s Outstanding General Obligation (GO) Bonds:
Moody’s Investors Service has upgraded San Jose Unified School District’s outstanding general obligation (GO) bonds to Aa1 and assigned an Aa1 rating to the district’s $121.53 million 2016 GO refunding bonds. The rating action affects approximately $545 million in debt, post-refunding. The upgrade to Aa1 reflects the district’s exceptionally large Silicon Valley tax base that has outperformed its peers in spite of state funding volatility.
Downgrades:
The City of Westland, MI’s GOLT Bond:
Moody’s Investors Service has downgraded the rating of the City of Westland, MI’s $3.3 million rated general obligation limited tax (GOLT) debt to A3 from A2. The downgrade to A3 reflects a weakened financial position following two consecutive years of deficits, limited revenue-raising capabilities to address operating challenges, and growing unfunded retirement liabilities.
Treasury Notes Yield Report:
| Year | Yield | +/- BPS in Week | +/- BPS in Month |
|---|---|---|---|
| 2-year | 1.05% | 5 | 12 |
| 5-year | 1.76% | 5 | 12 |
| 10-year | 2.27% | 3 | 6 |
| 30-year | 3.02% | 6 | 4 |
Municipal Index Curve Yields:
| Year | Yield | +/- BPS in Week | +/- BPS in Month |
|---|---|---|---|
| 2-year | 0.77% | 0 | +5 |
| 5-year | 1.26% | 0 | 0 |
| 10-year | 1.92% | -1 | -10 |
| 30-year | 2.82% | 0 | -14 |
Yield Ratios: Municipal Bonds vs. Treasury Bonds
| Yield Ratios | Ratio (%) |
|---|---|
| 10-year AAA Municipal vs. Treasury | 85% |
| 30-year AAA Municipal vs. Treasury | 94% |
| High-Yield Municipal vs. High-Yield Corporate | 77% |
Further Reading
Our article Top 3 Municipal Bond Fund Strategies for 2016 provides a list of a few muni bonds to be considered for 2016.
