Yields on AAA-rated muni bonds and U.S. Treasury bonds were higher at the end of the quarter than at its outset, with prices falling on news about interest rates and equity rallies. At quarter’s end, the ICE BofA Merrill Lynch AAA Municipal Securities Index had a yield of 2.40%, up 33 basis points for the quarter.1
At the same time, issuance of muni securities with maturities of more than 1 year fell significantly, with first-quarter volume reaching $62.8 billion, just $300 million more than in December 2017, a record-setting month. For the quarter, volume for bonds was down 31.7% versus the same quarter of 2017. During the first quarter, demand was uneven, many offerings were oversubscribed and the market continued to have negative net issuance, which is a positive for existing bondholders. Despite several weeks of outflows, the muni market was in inflows for the quarter.
Pricing pressure put an end to the yearlong streak of positive quarterly total returns for the muni market. The Bloomberg Barclays Municipal Bond Index, a measure of the market’s overall performance, had a total return of -1.11%.2 The Dow Jones Industrial Average hit new heights in January 2018, but ended the quarter down 2.49%. The S&P 500 index also lost ground, while the NASDAQ composite was up.
Unlike any of the Bloomberg Barclays single-state muni indices, the Bloomberg Barclays indices for the Commonwealth of Puerto Rico and the U.S Virgin Islands were positive at the end of the first quarter, with total returns of 1.36% and 1.11%, respectively. The Bloomberg Barclays index for high yield securities issued by Puerto Rico had a total return of 11.0% for the quarter.
At its March meeting, the first with Jerome “Jay” Powell at the helm, the Federal Open Market Committee (FOMC) raised the Fed Funds target rate to a range of 1.50% to 1.75%, citing recent strengthening of the economic outlook.Commonwealth of Puerto Rico and the federal oversight board established by PROMESA (the Puerto Rico Oversight, Management and Economic Stability Act of 2016) continued to generate headlines during the first quarter of 2018. Six months after Hurricane Maria devastated the island, recovery efforts are ongoing. Despite the hurricane’s impact, Puerto Rico’s retail sales rose 10.7% in 2017, according to government data released in March.
The government submitted a new fiscal plan in late January, and both the oversight board and creditors found it lacking. The plan anticipated budget gaps, assumed significant aid from the Federal Emergency Management Agency (FEMA), increased expenses while projecting a sizable population decline, proposed tax cuts, and failed to allocate money to debt payments.
In early February 2018, the oversight board told Gov. Ricardo Rosselló Nevares to revise various fiscal plans by February 12, saying that they did not comply with PROMESA. The next revision of the plan for the Commonwealth anticipated an accumulated surplus of $3.4 billion by fiscal year 2023. A further revision, released in late March, anticipated a surplus of approximately $6 billion by FY23; like its predecessors, the plan relied on financial data that has yet to be audited or released to the public. While it intended to certify a plan by late March, the oversight board extended the deadline and said that the new plan must demonstrate “consistency with historical actual expenditures.” [In early April, a further revision projected a surplus of approximately $6.4 billion by FY23.]
Our team continues to believe that the best interests of all stakeholders can be met through negotiated settlements that offer Puerto Rico a path forward, strengthen its economy, and improve the quality of life of its residents while providing investors with an appropriate return.
Despite market conditions, the Class A shares of 11 of our 13 funds produced positive total returns at net asset value (NAV) for the quarter. Additionally, in 10 of the 12 Lipper categories in which our funds compete, a Rochester fund’s share class was the top performer for the quarter. We see these results as a clear indication that our team’s continued focus on long-term, yield-driven performance serves to create shareholder value.
At the Thomson Reuters Lipper Fund Awards ceremony in February, two Rochester funds won best-in-class awards based on consistent returns for periods ended November 30, 2017 within their respective peer categories.3 The Y shares of Oppenheimer Rochester Short Term Municipal Fund were cited for consistent returns for the 3- and 5-year periods out of 90 and 76 funds, respectively, among the Short Municipal Debt Funds category. The Y shares of Oppenheimer Rochester Fund Municipals were cited for consistent returns in the 3-year period out of 87 funds among the New York Municipal Debt Funds category.
While you and your tax preparer may prefer to think about your tax return just once or twice a year, the active managers at Oppenheimer Rochester aren’t too sheepish to admit that we think about taxes – and how to limit your tax payments – each and every day.
- ^The ICE BofA Merrill Lynch AAA Municipal Securities index is the AAA subset of the ICE BofA Merrill Lynch US Municipal Securities Index, which tracks the performance of dollar-denominated, investment-grade, tax-exempt debt issued by U.S. states and territories and their political subdivisions; index constituents are weighted based on capitalization, and accrued interest is calculated assuming next-day settlement.
- ^The Bloomberg Barclays Municipal Bond Index is an unmanaged index of a broad range of investment-grade municipal bonds that measures the performance of the general municipal bond market. Index performance is shown for illustrative purposes only and does not predict or depict performance of our funds. Past performance does not guarantee future results.
- ^Lipper Awards are granted annually to the funds in each Lipper classification that achieve the highest score for Consistent Return, a measure of funds’ historical risk-adjusted returns, measured in local currency, relative to peers. Winners are selected using the Lipper Leader rating for Consistent Return for funds with at least 36 months of performance history as of 11/30/17. Awards are presented for the highest Lipper Leader for Consistent Return within each eligible classification over 3, 5 or 10 years. Other share classes may have different performance and expense characteristics. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Lipper awards are not intended to predict future results. Past performance does not guarantee future results. Generally, Y shares are only available to certain investors, including those in wrap-fee-based programs or commissionable brokerage platforms that charge sales commission.
These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the date of this publication and are subject to change based on subsequent developments.
Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates, or an expectation of rising interest rates in the near future, will cause the values of a Fund’s investments to decline. Risks associated with rising interest rates are heightened given that rates in the U.S. are at, or near, historic lows. When interest rates rise, bond prices fall and a fund’s share price can fall. Municipal bonds are subject to default on income and principal payments. Further, a portion of some funds’ distributions may be taxable and may increase alternative minimum tax (AMT) for investors subject to that tax; distributions from net realized capital gains are taxable as capital gains.
The funds invest in below-investment-grade debt securities, which may entail greater credit risks, as described in each fund’s prospectus. These securities (sometimes called “junk bonds”) may be subject to greater price fluctuations and risks of loss of income and principal than investment-grade municipal securities. The funds may invest substantially in municipal securities within a single state or related to similar type projects, which can increase volatility and exposure to regional issues. The funds may also invest substantially in Puerto Rico and other U.S. territories, commonwealths and possessions, and could be exposed to their local political and economic conditions. Deterioration of the Puerto Rican economy could have an adverse impact on Puerto Rican bonds and the performance of the Rochester municipal funds that hold them.