No, sorry, I cannot see that clearly. A mixture of snow and sleet is pelting me and I can’t see the bus stop a block away. The polar vortex is zigzagging through the streets at 30 mph. The -50˚ wind chill is cold enough to stop your heart. Readers, welcome to winter in Chicago.

Is it any worse than sitting at my desk watching the markets? Perhaps not. No offense Al Roker, but forecasting the weather is probably easier than forecasting interest rates, particularly for the coming year. Studies have shown over the years that most economic rate projections are terribly inaccurate with forecasts bunched together from crowd behavior. So what to do? Run multiple scenarios, assign probabilities and spit out the most likely base case at that point in time. Use that along with the structure of your portfolio’s benchmark as a guidepost for the next few months, tweaking as a multitude of economic reports stream out. Here we come 2019.

The rain is gone...

Perhaps a bit as 2018 was quite stormy for many investors, particularly on the equity side. It was a wild fourth quarter as equity weakness in October was followed by bond yields peaking in early November and then falling dramatically through year-end. Equity investors faced a number of worries including U.S. central bank tightening, weaker Chinese growth, Brexit concerns, continuing trade wars and the potential for a global slowdown. In this turbulence, investors flew to quality — U.S. Treasuries and municipal bonds, the usual risk-off trade. As a result, yields fell in the last two months of the year, pushing municipal bonds into positive territory for the year. As the 10-year treasury yield declined from a peak of 3.25% to 2.69%, municipal 10-year yields fell by about half a percentage point, from 2.80% to 2.30%.

The Bloomberg Barclays 1-15 year Muni Blend Index, which as recently as October was in negative territory, returned 1.71% for the quarter. For the year, the Index returned 1.58%. Because of this year-end rally, every municipal index we follow ended the year in positive territory. This compares favorably to the total return of other U.S. taxable fixed income indices. For example, the Bloomberg Aggregate Bond Index eked out a 0.01% return for the year, while the Bloomberg U.S. Treasury Index returned 0.86%.

Issuance for 2018 totaled $338 billion, which was down 24% from the previous year’s $449 billion. The market expected this substantial drop in volume as issuers were rushing to market numerous deals before 2017’s tax law changes took effect. As for the demand side as measured by municipal net fund flows, tax loss selling was a significant factor for year-end outflows as investors took some gains in muni products to offset equity losses. The positive returns in November and December were not enough to attract large inflows. Despite this, total municipal fund flows for 2018 were largely positive at $9.6 billion. Like last year, we are off to a good start in the first month of 2019 with about $5 billion of net inflows. A good portion of this is likely from maturing municipal bonds and coupon payments, which are often reinvested back into tax-exempt bonds and funds. So overall, we had a relatively decent 2018 in Muni Land.

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