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The US municipal market registered strong performance in 2019, driven by record demand from individuals and constrained supply of tax-exempt issuance. Both factors grew out of changes legislated in the 2017 Tax Act. As we enter 2020, valuations appear tight versus Treasurys and fair versus corporates and risk assets generally. Credit fundamentals have been improving in aggregate as the economic expansion continues. However, many state and local entities have underfunded long-term liabilities, such as pensions and other post-employment benefits (OPEB), which continue to be a long-term unresolved challenge for many large issuers.
Recently, advance refunding issuance has returned to the municipal market in the form of taxable municipals issued to refinance tax-exempt debt. This activity helped expand taxable issuance substantially, and is expected to increase in 2020 provided long-term rates stay low. We expect market returns will be less than last year's returns. However, we believe the market should continue to find support from the relatively constrained supply of tax-exempt issuance and strong demand from individuals, particularly those in high-tax states. Additionally, the increase in taxable municipal issuance has helped expand the diversification opportunities available to institutional investors looking for an alternative to investment grade corporates.
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Market conditions are extremely fluid and change frequently.
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subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Information, including
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