In this edition, a rare dynamic in the bond markets: the inverted municipal bond yield curve. Our President of Fixed Income & Data Services Amanda Hindlian explores the implications. Elsewhere in munis, our research paper examines the link between access to U.S. municipal debt and socioeconomic outcomes. And enjoy the first episode of Fixed Income in Focus, where ICE executives are joined by thought leaders in the investment and trading community.
We’re witnessing a rare dynamic in the bond markets, which fund critical infrastructure for communities across the U.S. This dynamic has the potential to shake-up market fundamentals, and we’re watching it closely: the inverted municipal bond yield curve.
The ICE Municipal AAA yield curve inverted in December 2022 and is at a record level of inversion since ICE began tracking it in 2010. To give some idea of scope: earlier this month on February 15, the largest inversion between the 1Y and 3Y was ~52bps. Outside of that, the next highest inversion was just ~15bps on March 18, 2020 at the height of COVID fears. The current prolonged inversion is notable because unlike the inverted Treasury yield curve -- a common recession bellwether -- the muni curve rarely inverts.
So what are the implications? Muni issuers are being sidelined and new issuance projections for 2023 could be cut. This comes amid a lackluster period for the sector, with new issues falling ~20% last year -- the biggest drop in four decades. In practical terms, municipalities have seen short-term financing costs for infrastructure projects soar, with project delays seeming likely.
For market pundits, an interesting question may be whether we start to see higher correlations between Treasuries and munis. One interpretation of the current inversion is that munis have simply followed the Treasury inversion after the Fed’s historical tightening, albeit after a long delay. This dynamic could spell less opportunity to spot compelling relative value trades between Treasuries and munis, with more porous volatility contagion across both markets. Already, we’re seeing the debt ceiling debacle shake muni markets along with Treasuries. Could additional market volatility threaten the perceived safe-haven status of munis?
On the upside, munis have traditionally been immune to the kinds of market dynamics that affect broader asset classes. More predictability through increased correlation with Treasuries may not be a bad thing. Alongside this, we’re seeing electronic trading grow steadily for the sector, which supports liquidity and market participation. Notably, the advent of ETFs and Separately Managed Accounts (SMAs) has broadened the scope of individuals who access munis. Traditionally seen as a solid retirement investment, younger individuals are now recognizing the tax benefits munis offer. This shift has allowed greater institutional adoption of munis, reflected in the 200% growth we saw in institutional firms accessing our muni liquidity last year.
Last year, we held our inaugural Fixed Income Forum which brought together industry leaders to talk about the latest trends and challenges in fixed income. The event also featured best practices from industry peers on finding efficiencies and automation across the front, middle and back office, as well as discussion about the regulatory landscape and the impact of ESG on fixed income investments.
We’re continuing that conversation with Fixed Income in Focus, where ICE’s senior leadership is joined by thought leaders in the investment and trading community to discuss electronification and opportunities in the fixed income markets. In the first episode, Michele Nicoleta, VP, Fixed Income Corporate Development, ICE speaks with Daniel Veiner, Co-Head of Global Trading, BlackRock on news and trends affecting fixed income markets.
As hybrid work proliferates and market uncertainty lingers, accessing quality data both securely and economically is crucial. In this interview, ICE’s Director of Business Development, Larry Rorrison, shares his views on the risks that poor quality data poses to companies at the Fixed Income Leaders’ Summit.
The more money you have, the cheaper borrowing tends to be. But for poorer school districts seeking to finance infrastructure, maybe that shouldn’t be the case. A study by ICE data scientists analyzed over 12,600 school districts across the US, alongside academic literature, to inform municipal bond market participants and stakeholders about how capital allocation and policy choices may impact students, school districts, and communities.
Manage risk, uncover opportunities, and make informed decisions in real-time with ICE’s end-to-end fixed income solutions.
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