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AAM Viewpoints – A Look Back at the One-Year Anniversary of the Municipal Bond Market Selloff of 2020




As we approach the March Anniversary of the massive short-term sell-off of the Municipal Market, we can’t help but think of how resilient the bond market is and how important the Federal Reserve is for stabilizing our markets. Our goal is to provide a timeline of events that not only led to one of the biggest selloffs of our generation, but also, the significant rally that ensued thereafter.

In February 2020, the CDC confirmed the first transmission of COVD-19 in the U.S. News of the deadly virus making its way into the U.S. sent shockwaves throughout the world creating uncertainty in the markets. Market analysts questioned whether these were just a few isolated cases or if a full-blown pandemic was possible. The beginning of March started off as any other month of March historically would for the markets. On March 2, 2020, the Dow Jones Industrial Average (DJIA) closed at 26,703.32, The 10-year Treasury note closed at 1.165% and the BVAL Muni AAA Yield Curve 10-year Treasury (10T) Index closed at 0.969%. Just 17 days later, we would see the DJIA close at 18,591.93 – a drop of 8,111.33 points, or a loss of approximately 30%. The 10-year Treasury note closed at 0.848% and the BVAL Muni AAA Yield Curve 10T Index close at 2.88% – a move of over 191 bps (basis points).

The BVAL Muni AAA Yield Curve 10T Index, The DJIA, Generic 10-year Treasury Index  
The BVAL Muni AAA Yield Curve 10T Index, The DJIA, Generic 10-year Treasury Index
Source: Bloomberg | Past performance is not indicative of future results.

A look inside the numbers for the Bloomberg Municipal Bid Wanted Page (MBWD – where Institutional, Brokerage firms and advisors put their municipal bonds out for bid on a daily basis) paints a very vivid picture of the panic selloff that ensued between March 3, 2020 and March 20, 2020.

On March 2, 2020 Municipal bonds out for bid on MBWD sat at 5,318 items totaling approximately 136,317,000in par amount. On March 19, 2020 MBWD had 9,709 items out for bid totaling approximately 411,530,000 in par mount well above the average items out for bid of 3,364 and a par amount for the previous year of 76,704,000. With the significant amount of bonds out for bid and very few traders willing to catch the proverbial falling knife, the Municipal market began its selloff with yields rising and prices falling at a rate unlike we have ever seen before. Below is a chart that details the numbers:

MBWDPAR Index and MBWDITM Index  
MBWDPAR Index and MBWDITM Index
Source: Bloomberg | Past performance is not indicative of future results.

On March 15, 2020, the Fed – in an unprecedented move – stepped in to save the U.S. economy from disaster. According to USA Today the Fed cut the benchmark interest rates to zero and promising to boost its bond holdings by at least $700 Billion.

We believe this move by the Fed saved the market from a freefall and the race back to normalcy began. Obviously, there were other moves, such as Congress passing the first CARES Act on March 25, 2020. This act was instrumental in instilling confidence in U.S. markets. All eyes from the financial markets were looking for guidance from President Donald Trump, Treasury Secretary Stephen Mnuchin, the Federal Reserve and Congress to provide liquidity to the markets and help ease the pandemic fears and the possibility for a recession.

In a matter of days, the BVAL AAA Yield Curve 10T Index rallied from its high on March 23, 2020 of 2.88%, to a low of 1.378% on March 30, 2020. The start of the rally in Municipal Bond rally had begun.

BVAL AAA Yield Curve 10T Index
BVAL AAA Yield Curve 10T Index
Source: Bloomberg | Past performance is not indicative of future results.

If we look at the entire year for the BVAL AAA Yield Curve 10T Index, beginning March 1, 2020 and ending February 25, 2021, we can confirm the low on March 23, 2020 of 2.88% and the unprecedented rally to the high of 0.559% on August 10, 2020. This is a difference of 232 bps.

BVAL AAA Yield Curve 10 T Index BVAL AAA Yield Curve 10 T Index
Source: Bloomberg | Past performance is not indicative of future results.

As we look at the chart below and compare the BVAL AAA Yield Curve 10T Index, MBWD Par Amount, and the MBWD Items out for bid, we can summarize that from the from March 1, 2020 to March 23,2020, the increase in par amounts and the abundance of items out for bid had tremendous impact on the movement of the BVAL AAA Yield Curve 10T Index.

MBWDPAR Index and MBWDITM Index – BVAL AAA Yield Curve 10T Index
MBWDPAR Index and MBWDITM Index – BVAL AAA Yield Curve 10T IndexSource: Bloomberg | Past performance is not indicative of future results.

The comparison between the percentage of municipal yields to Treasury yields have always been helpful in determining how expensive municipal bonds are to treasuries. The chart below details the significant changes from March 1, 2020 to February 26, 2021. It also depicts how rich the municipal market is today. On March 23, 2020, the 10-year Municipal-to-Treasury ratio was an amazing 365% to the Treasury compared to the 54% we saw just a few short days ago on February 16. Over the last five years, the average 10-year Municipal-to-Treasury ratio has averaged approximately 94%. Amazingly, the recent selloff has improved the ratio. As of February 26, 2021, the 10-year Municipal-to-Treasury ratio stood at 80%, up from 70% at the beginning of the week of February 22.

10-Year Municipal-to-Treasury Ratio
10-Year Municipal-to-Treasury Ratio
Source: Bloomberg | Past performance is not indicative of future results.

5-year chart 10-year Municipal-to-Treasury Ratio
5-year chart 10-year Municipal-to-Treasury Ratio

Source: Bloomberg | Past performance is not indicative of future results.
 
10-Year Municipal-to-Treasury Ratio (as of 2/26/2021)
10-Year Municipal-to-Treasury Ratio (as of 2/26/2021)
Source: Bloomberg | Past performance is not indicative of future results.


As we move forward in 2021, fears of inflation have spooked the market. Discussion of a new stimulus package of approximately $1.9 trillion is a major cause for the uncertainty. The development of vaccines for COVID-19 rolling out has the market analyst thinking that the stimulus amount may be too much. In turn, many analysts are wondering if inflation is around the corner. If we compare indices, we could assume that uncertainty has again infiltrated our markets.

If we look at the chart below, on February 1, 2021 we saw a significant move in the U.S. 10-year Treasury GT10 and BVAL AAA Yield Curve 10T Index.

  • On February 1, the BVAL AAA Yield Curve 10T Index was at a 0.700%.
  • On the morning of February 26, the same index was at 1.12%, a move of 0.42 bps.
  • On February 1, the U.S. 10-year Treasury GT10 was 1.079%.
  • On the morning of February 26, it was at 1.503% – a difference of approximately 43 bps.

This is an example of another volatile move in a noticeably short period of time.

U.S. 10-year Treasury GT10 and BVAL AAA Yield Curve 10T Index (as of 2/26/2021)
U.S. 10-year Treasury GT10 and BVAL AAA Yield Curve 10T Index (as of 2/26/2021)

Source: Bloomberg | Past performance is not indicative of future results.

As we approach the March anniversary of the Municipal Bond Selloff of 2020, can we assume that inflation has reared its ugly head back into our markets? Where will we go from here?


CRN: 2021-0304-9001 R

AAM was not involved with the preparation of the articles linked to in this post and the opinions expressed in these articles are not necessarily those of AAM.

An investment in Municipal Bonds is subject to numerous risks, including higher interest rates, economic recession, deterioration of the municipal bond market, possible downgrades, changes to the tax status of the bonds and defaults of interest and/or principal. A bond’s call price could be less than the price the trust paid for the bond. Bonds typically fall in value when interest rates rise and rise in value when interest rates fall. Bond insurance covers interest and principal payments when due and does not insure or guarantee the value of any bond in any way.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.


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