Spread tightening continued to lift the quarterly performance of portfolios that were invested across the credit spectrum, and the market’s performance for the trailing 12 months remained slightly positive as of September 30, 2018, thanks to results in the fourth quarter of 2017 and the second quarter of this year.
The major U.S. equity indices were strong performers in the third quarter, with the Dow up 9.3%, the S&P 500 up 7.2%, and the Nasdaq Composite up 7.1%. The Nasdaq closed at a record high of 8,109.69 in late August, while the Dow and the S&P each had record high closes – 26,743.50 and 2,930.75, respectively – in late September.
Yields on Treasury bonds rose during the quarter, with slightly greater increases at the short end of the curve. Having dropped below 3% after attaining that yield periodically during the second quarter, 10-year Treasuries returned to passed the 3% mark at the start of August, fell back for about 6 weeks, and then passed it again in mid-September. Yields responded favorably to expectations about economic growth, an upward revision to July’s retail sales figure, and the apparent lessening of trade tensions.
Yields on AAA-rated municipal bonds increased at all maturities, though less so at the middle of the curve. The spread for AAA-rated munis, which had been virtually the same on June 30 as on March 31, narrowed during the third quarter as the curve continued to flatten flat. The Treasury yield curve also continued to flatten as yields of shorter maturity bonds rose.
On September 26, the Federal Open Market Committee (FOMC) raised the Fed Funds target rate to the range of 2.00% to 2.25% and signaled that future rate increases should be expected. The short-term rate has been increased by a quarter point three times in 2018 and eight times in all since December 2015. The FOMC was unanimous in its decision to raise the Fed Funds rates and cited strength in the labor market, economy, household spending, and business investment. The latest forecasts by the Fed’s governors indicate an expectation of five additional rate increases by December 31, 2019.
Technicals remained strong throughout the quarter, and demand for munis continued to exceed supply. For the Q3 2018, volume for bonds maturing in more than one year totaled $84.2 billion, declining 8.0% versus Q3 2017 and 15.6% versus Q2 2018. At $249.4 billion as of September 30, trailing 9-month volume has not been this low since September 30, 2014. Year to date, net issuance has been negative.
The overall size of the market for municipals edged up $2 billion in the second quarter of 2018, to $3.85 trillion, according to Federal Reserve data released in September. For the second consecutive quarter, U.S. banks pared back their positions in light of lower corporate tax rates, which have served to lessen the relative appeal of tax-free income; in all, financial institutions reduced their muni holdings by $40.3 billion during the quarter. The household sector was down slightly quarter to quarter, and mutual funds bought just $20.5 billion in munis, 68% less than in the first quarter of the year.
No one likes a summertime slump, but seasoned portfolio (and baseball) managers know that the right approach often involves looking for solid trades that can help drive performance for the long term.
View quarterly performance highlights for Oppenheimer Short Term Municipal Fund, Oppenheimer Intermediate Term Municipal Fund and Oppenheimer Municipal Fund.
View quarterly performance highlights and fund-specific information for the Rochester funds.
Fixed income investing can entail credit and interest rate risks; as interest rates rise, bond prices generally fall and a fund’s share price can fall, too. A portion of a municipal bond fund’s distributions may be subject to tax and may increase taxes for investors subject to federal alternative minimum tax. Capital gains distributions are taxable as capital gains.
Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Under certain market conditions, some unrated securities may trade less actively than rated securities. Our funds can have a relatively high portion of their portfolio holdings in particular segments of the municipal securities market, such as tobacco bonds or real-estate-related securities. They may also invest substantially in municipal securities within a single state or related to similar type projects, which can increase volatility and exposure to regional issues. Diversification does not guarantee profit or protect against loss.