Municipal bonds have experienced firmness in the market recently, with U.S. Treasury yields seeing a slight decrease and equities displaying a mixed performance. The rally in USTs has been fueled by softer economic data, leading to a drop in yields over the past week. Barclays strategists, Mikhail Foux and Clare Pickering, highlighted a shift in the muni market, which had shown signs of weakness in late May. While the rally is expected to continue gradually throughout the summer, BofA strategists predict that a solid job market will further support muni credit spreads as the market drives towards newer lows, excluding the high-yield index. There is a possibility of an acceleration in the muni market rally in the future, particularly after September, if a re-flattening in the UST rates market becomes the consensus, according to BofA strategists. They have set a year-end target of 1.80%-1.90% for the 10-year AAA, signifying a potential 100bp rally from current levels for the 10-plus year part of the muni curve. The market is already factoring in next year’s Federal Reserve rate cuts in the final quarter, as per BofA strategists’ analysis.
Barclays strategists pointed out that high-yield munis have seen significant gains in June, while investment-grade returns are still in negative territory for most rating buckets year-to-date. The muni-to-Treasury ratio on Friday stood at varying levels across different maturity segments, indicating the market’s current positioning. Looking ahead, Barclays strategists are adopting a neutral stance as they wait for MMD-UST ratios to further cheapen before becoming more aggressive, considering the potential return of rate volatility in the near future.
The new-issue calendar is set to rise to $7.284 billion next week, with negotiated deals leading the way. The negotiated calendar includes offerings such as green AMT special facilities revenue bonds for the John F. Kennedy International Airport New Terminal One project and gas supply revenue refunding bonds. The competitive calendar is also active, with Olathe, Kansas, planning to issue GO temporary notes. Additionally, AAA scales across different data sources have seen minor adjustments in basis points, reflecting the evolving yields in the market. Municipal yield curves have shown slight movements, with Treasuries maintaining a firmer stance in longer maturities.
Several municipal issuers are set to price their offerings in the coming days, with a mix of green bonds, revenue refunding bonds, affordable housing revenue bonds, and more coming to market. These issuances cover a wide range of projects and purposes, showcasing the diversity of the municipal market and the ongoing demand for tax-exempt and taxable municipal securities. The market remains active, with opportunities for both investors and issuers to participate in financing essential projects across various sectors.
The municipal market continues to navigate through changing economic conditions and evolving investor sentiments. As the market anticipates further rate cuts and potential shifts in UST rates, investors are closely monitoring developments to identify opportunities and manage risks effectively. The upcoming new issuances present opportunities for investors to diversify their portfolios and support essential projects that contribute to the overall growth and stability of the municipal market.