It was another difficult week for fixed income markets and in particular the Municipal bond market. The combination of a light week for Municipal investors and waiting until Friday for Fed Chairman Powell to speak drove prices down and yields up. His hawkish statements on Friday drove yields higher as traders readjusted their interest rate bets. Even with higher rates the yield curve continues to be inverted as investors continue to expect a sustained slowdown in economic activity.
The Bloomberg Municipal bond index was off -0.47% and the Bloomberg Long Term Municipal index -0.83%. The First Trust Municipal Closed end fund index returned -1.15% for the week as discounts widened out making an already appealing asset class even more appealing.
It has been an extremely volatile year for the Municipal bond market which is down between 9% - 12% while closed end funds are down approximately 25%. Economic indicators and Municipal bond market history suggest attempting to generate an above average tax-free yield while anticipating lower long-term rates in the next 6-12 months.
Last week witnessed the third consecutive week of outflows for the Municipal market with investors withdrawing over $1Billion across all sectors of the Market. The ratio of Municipal Yields to Treasuries cheapened on the short end but remain rich while ratios 10 years to 30 years on the yield curve have reached undervalued territory. '
The big news this week will be the unemployment number on Friday. While the average Bloomberg forecast is 300k the prior numbers have been significantly stronger, and investors are waiting to see if that happens again. While economic indicators have been decidedly weaker, the employment number has defied all those numbers and been significantly stronger adding confusion to the direction of the economy. A stronger number will maintain the confusion and add to volatility while a weaker number could bring all the indications into line and set up scenario of higher prices for fixed income assets going forward.