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  • Muni Nation

    Where Was the 2018 January Effect?

    Michael Cohick ,Senior ETF Product Manager
    February 13, 2018
     

    The "January effect" is based on the idea of a seasonal increase in asset prices in January, generally driven by supply-demand dynamics. This year it was nowhere in sight for the muni market. However, signs leading up to the start of the year had suggested the likelihood of a strong January effect, so we'll be watching to see how this plays out in the remainder of the year.

    In 2017, January got off to a racing start but came to a screeching halt by mid-month. The end result was the weakest January since 2013, with over $31 billion of municipal bonds being issued during the month, 40.0% above the 10-year average for the month.1

    And then December 2017 rolled around. As negotiations around the proposed new tax legislation continued, confusion and uncertainty reigned. What was going to happen with advanced refundings? What was going to happen with Private Activity Bonds2 (PABs)?

    Issuance Boom in December

    The result was issuance in the municipal market—really big issuance! At $62.5 billion, December 2017 beat the December 1985 record, and was 113% greater than the decade average.3 Heading into 2018, issuance looked like it had been absorbed, and there was word that, in anticipation of lean issuance in January, a number of players in the market had taken quantities of bonds onto their own books. (In the event, PABs were not repealed, but following the end of the year, issuers of tax-exempt debt no longer have the authority to advance refund bonds with tax exempt debt.)

    January Municipal Bond Returns: 2000 - 2018

    Chart of January Municipal Bond Returns: 2000 - 2018

    Source: Morningstar. Based on the Bloomberg Barclays Municipal Bond Index. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. For illustrative purposes only.

    As things turned out and despite various indications to the contrary (including anticipation for sparse 2018 supply), January 2018 performance was notably negative. Quite a rare outcome for municipal performance in the month of January. We feel lingering uncertainty about the impact of the new tax rules may have played a role, as market participants wait on the sidelines for more clarity.

    From our perspective, munis and their tax-exempt status still sustain their appeal in spite of the corporate and individual tax rate changes (See "Munis Remain Attractive Despite Tax Changes). As the impact of the tax changes continue to become more concrete, potential opportunities will likely become clearer.

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