Highlights Tax-exempt municipals posted positive results in May, but underperformed Treasuries as investors flocked to the relative safety of government issues. The performance disparity has created attractive muni-to-Treasury yield ratios that are well above 100% across all maturities. Increased municipal bond supply continues to be well absorbed as the attractive ratios earn the attention of non-traditional and crossover buyers. Market Overview
Performance in the tax-exempt municipal market was positive in May, with the long end taking the lead as investors continued to travel further out on the curve in search of yield enhancement. Despite the positive absolute results, munis underperformed Treasuries amid a dramatic investor flight to quality that sent 10-year Treasury yields to new all-time lows. The investor response was led by renewed angst over the financial turmoil in Europe and continued signs of weakness in the domestic economy. The yield decline (and price increase) in the tax-exempt municipal market was sparked by these same factors, but was much less pronounced than in the taxable space. The price underperformance led to attractive muni-to-Treasury yield ratios, which ended the month well above 100% across all maturities. In essence, the market is not pricing in the tax benefit that the asset class offers investors. The appealing relative value should continue to capture the interest of non-traditional and crossover buyers and also help to limit volatility as we enter June, which typically is not overly friendly to muni performance as states negotiate their budgets and issuance picks up. New issuance was $37 billion in May and nearly $150 billion year-to-date, an increase of 76% versus one year ago. The pick-up in supply has been met by continued strong demand. Municipal bond mutual funds saw inflows each week of May, with the majority targeting the higher-yielding long-term and high yield funds. ICI reports $23.5 billion in total inflows so far …