The Q4 Equity Rout Fueled Best Quarter Since 2017
While holiday shoppers headed to real and virtual malls in the latter half of the fourth quarter, many investors fled the U.S. equity markets. The stock market’s double-digit declines in the final three months of 2018 contributed to the municipal bond market’s highest quarterly total return in more than a year.

Overall, the $3.8 trillion muni market produced a fourth-quarter total return of 1.69% and a 2018 total return of 1.28%, according to the Bloomberg Barclays Municipal Index, a widely used index of the performance of the general municipal bond market.1 Quarterly performance in the muni space has been weaker in the previous five quarters, though what is true in general is not always true in particular, as this report highlights below.

During the fourth quarter, as the muni market returned to positive performance, the Dow Jones Industrial Average declined 11.8% for the quarter and 5.6% for the year; the S&P 500 was down 14.0% for the quarter and 6.2% for the year; and the Nasdaq Composite was off 17.5% for the quarter and 3.9% for the year. Given that all three indices had record-high closes in the latter half of 2018, these year-end figures were all the more jarring for many investors.

Technicals remained strong throughout the quarter, and demand for munis continued to exceed supply. For the fourth quarter, volume for bonds maturing in more than one year totaled $86.4 billion, down slightly in comparison to the third quarter but down sharply (40.2%) versus the fourth quarter of 2017; investors will recall that the passage of the Tax Cuts and Jobs Act, which became effective at the start of 2018, led many issuers to come to market in late 2017, when pre-refundings were still allowed.2 For the year, long-term volume declined by 22.3%, ending at $338.9 billion.

New money issuance, which has represented no more than 51% of annual volume since 2011, jumped to approximately 70% of volume in 2018, and net issuance for 2018 was negative $45 billion, the largest negative net supply figure in more than 2 decades, according to the Securities Industry and financial Markets Association (SIFMA). Like the decline in overall volume, negative net issuance is a positive for existing bondholders.

Yields on Treasury bonds fell during the quarter, as skittish equity investors fled to safety amid ongoing concerns about the future of interest rates. Yields on AAA-rated municipal bonds also decreased, and munis remained “cheap to Treasuries.” At year-end, 30-year AAA munis offered a higher nominal yield than 30-year Treasuries.

On December 19, the Federal Open Market Committee (FOMC) raised the Fed Funds target rate to the range of 2.25% to 2.50%. This ninth consecutive quarter-point increase was expected, but the announcement that 2019 would likely see two or fewer rate increases was not. Earlier indications were for the FOMC to raise the Fed Funds rates at least three times in 2019. Factors leading to the FOMC’s December decision to raise rates for the fourth time in 2018 included low unemployment, moderate growth in business fixed investment, and strong upticks in household spending and economic activity. The FOMC was unanimous in its decision.

Muni bond funds that tend to invest across the credit spectrum continued to benefit from the credit spread tightening that occurred in 2018, despite some widening in December. Demand for below-investment-grade securities (and the total returns they typically generate) was strong.

Moody’s Investors Service continues to issue more upgrades than downgrades in the municipal market. Additionally, only four issuers filed for Chapter 9 bankruptcy in 2018, a figure that matches the all-time low that was set in 2015. Both of these developments represent further evidence of the strength of the municipal bond market.

Securities issued by the Commonwealth of Puerto Rico underperformed in the fourth quarter but were up 6.0% for the year, according to Bloomberg Barclays. High-yield Puerto Rico bonds, which are held in 10 of the 13 Oppenheimer Rochester funds, were up 36.4% in 2018. Securities issued by Puerto Rico were the No. 1 driver of 2018 annual total return for the Rochester complex overall and for each of the 10 Rochester funds that hold these types of securities.3 At year-end, our funds’ investments in a diverse set of securities issued by Puerto Rico and its instrumentalities contributed favorably to 5-year total returns complex-wide.

Puerto Rico, its municipalities, and many of its residents benefited during 2018 from “boots on the ground” and a wide array of financial resources to help repair the damage caused by Hurricane Maria, which devastated the island in 2017.The governor, Ricardo Rosselló Nevares, continues to seek additional resources to drive “transformation and innovation,” even as Puerto Rico’s Treasury Department reported a year-end cash position of $3.646 billion. This amount represents an increase of nearly $2 billion versus year-end 2017 and has been amassed even as the government continues to lament conditions on Puerto Rico.

Some Puerto Rico issuers remain current in their debt payments, but the Commonwealth stopped making payments on general obligation (G.O.) bonds in 2016. Meanwhile, the debt-restructuring agreement on COFINA debt (which is backed by the Commonwealth’s sales and use tax) was awaiting a court approval as of December 31, 2018, and details related to the debt-restructuring agreement for PREPA bonds, issued by Puerto Rico’s electric utility authority, had not yet been ironed out.

All Oppenheimer Rochester’s 13 municipal bond funds ended 2018 with positive annual total returns at NAV, including 4 that delivered double-digit results. Tax-free income comprised 100% of the total return for 3 of our funds, further evidence supporting the Rochester team’s focus on yield as the long-term driver of performance.

In other fourth-quarter developments, Oppenheimer Rochester Minnesota Municipal Fund was renamed Oppenheimer Municipal Fund and became a national fund; various changes were made to its prospectus. On October 18, 2018, Massachusetts Mutual Life Insurance Company, an indirect corporate parent of OppenheimerFunds, Inc. and its subsidiaries, announced that it has entered into an agreement whereby Invesco Ltd., a global investment management company, will acquire OppenheimerFunds, Inc. Invesco’s president and CEO has said that “there are no plans for fund mergers.”

As has been the case for more than 3 decades, the Rochester team will remain focused on pursuing competitive levels of tax-free yield on behalf of our shareholders. Our product line has been designed to meet the varied needs of investors seeking tax-free income, and we are honored that so many Americans trust us to help them meet their personal financial objectives.


  1. ^The index consists of a broad range of investment-grade municipal bonds, is unmanaged, and cannot be purchased. Our funds’ investments are not limited to the investments comprising the index. The performance of the index includes reinvestment of income but does not reflect transaction costs, fees, expenses, or taxes.
  2. ^In a pre-refunding, an issuer sells new bonds at a current (i.e., lower) interest rates and uses the proceeds to pay off higher-coupon securities ahead of their call dates.
  3. ^Oppenheimer Rochester offers three funds that cannot invest in the securities issued by Puerto Rico or other U.S. territories: Oppenheimer Short Term Municipal Fund, Oppenheimer Intermediate Term Municipal Fund, and Oppenheimer Municipal Fund.