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A muted muni reaction and a recap of recent ratio movements

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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Cynthia J. ClemsonCo-Director of Municipal Investments, Eaton Vance Management and Craig R. Brandon, CFACo-Director of Municipal Investments, Eaton Vance Management

      Boston - The half-percentage point interest-rate decrease by the Federal Reserve caps off an already volatile week in the US interest rate market. The emergency announcement and comments from Chairman Powell aimed to quell the fear of an economic slowdown associated with the spread of the coronavirus underscore the belief that US economic fundamentals remain strong. The immediate reaction in the US Treasury market has been a decline in yields, with the 10-year Treasury moving from 1.12% to as low as 0.92% and settling around 1.01%. The municipal market reaction in 10-year AAA municipal yields was relatively muted, closing 3 basis points higher today at 0.96%.

      While Treasurys rally, municipals are slower to react

      Over the last week, interest rates on AAA municipal bonds have lagged the rally in the Treasury market. Including today's market reaction, the 10-year municipal yields have declined 2 basis points from a week prior, compared to a decline of 32 basis points in the 10-year US Treasury yield.

      Prior to this significant rally, municipals appeared "rich" relative to comparable US Treasurys. The muni-to-Treasury ratio, a common gauge for evaluating the value provided by AAA municipals relative to Treasury bonds of the same maturity, was lower than the historical average. The 5-year, 10-year and 30-year muni-to-Treasury ratio on February 25 was 66%, 74% and 87%, respectively. These levels generally suggest municipal bonds were trading rich relative to Treasurys. However, following the rapid decline in US Treasury yields, the muni-to-Treasury ratios have moved in line and even above the historical averages, ending today at 92%, 95% and 96%, respectively.

      Bottom line: While other credit markets are experiencing volatility, the municipal bond market appears to be functioning well. The movement in ratios closer in line and even above historical averages brings some relief for an asset class that appeared rich relative to Treasurys. Despite the lower nominal yields, the municipal market may still provide attractive tax-equivalent yields for investors in high federal and state tax brackets. Additionally, exposure to municipals, which have exhibited negative correlation to equities, may provide some welcome balance to portfolios as equity markets swing wildly.

      tax forward