As we approach the Federal Open Market Committee meeting and Consumer Price Index report, the municipal market remains relatively stable. Despite some fluctuations in U.S. Treasury yields and mixed performance in equities, experts like Vikram Rai from Wells Fargo are noting a downward adjustment in market expectations for Fed cuts since the beginning of the year. This shift is attributed to significantly improved economic indicators such as economic activity, job growth, and inflation. While rates have seen an upward trend this year to reflect this positive data, investors are also acknowledging that the catalysts for further rate increases may not be as strong. Rai emphasizes that the market now anticipates only one cut this year, reflecting a cautious approach to future rate adjustments.
Despite fluctuations in the muni-UST ratios following a recent UST selloff, Rai suggests that valuations in the municipal market are still compelling. The ratios for various maturities, ranging from two years to thirty years, point to the attractiveness of municipal bonds relative to Treasuries. Despite the ongoing market events, Rai remains cautious, especially leading up to the CPI report and FOMC meeting, which could potentially trigger shifts in yields.
This week saw a flurry of activity in the primary market, with notable issuances from entities like Los Angeles County, Massachusetts Water Resources Authority, and New York City Housing Development Corp. These offerings included a mix of new-issue bonds and refunding bonds, showcasing the diverse nature of municipal securities being brought to market. Pricing details for each tranche reflect different yield levels and call provisions, highlighting the complexities of these issuances and the considerations investors must take into account.
Looking ahead, analysts like Matt Fabian from Municipal Market Analytics point to an elevated forward supply calendar compared to seasonal averages. Despite this, price resilience in tax-exempt paper suggests that demand remains robust, with substantial reinvestment activities underway. The upcoming seasonal reinvestment is set to inject significant liquidity into the market, supported by strong net customer buying and fund flows. The recent drop in supply is expected to be temporary, as the market continues to adapt to changing conditions.
Various yield curves, including Refinitiv MMD, ICE AAA, S&P Global Market Intelligence, and Bloomberg BVAL, provide insights into the relative pricing of municipal securities across different maturities. Despite some fluctuations, these indicators showcase the overall stability of the market and the resilience of municipal bonds. In comparison, U.S. Treasuries saw firmer performance, with yields adjusting slightly lower across different maturity buckets by the close of the trading day.
The municipal market’s surprising stability amidst ongoing economic developments highlights the resiliency of these securities. As investors navigate changing market conditions and await key economic reports, the prudent approach advocated by experts underscores the importance of careful analysis and risk management in municipal bond investing.