The municipal bond market remained steady as U.S. Treasury yields saw a decline and equities closed on a positive note. With a light new-issue calendar expected for the week due to the holidays, the market is likely to see limited activity. However, the influx of around $31 billion in July reinvestment cash will provide investors with an opportunity to put their money to work. The absence of new issuances and strong dealer balance sheets may lead to a high demand for municipal bonds in the upcoming weeks. Market analysts predict that the market will become ‘grabby’ as investors seek attractive investment options amid favorable conditions.
Market Ratios and Valuations
Muni-to-Treasury ratios have shown variations across different maturity periods, with the 30-year ratio standing at 81% as per Refinitiv Municipal Market Data. Despite seeing a rise in valuations in June, current levels remain lower than those observed earlier in the year. Market analysts anticipate that ratios will continue to be rich throughout the summer as issuance slows down, creating a net negative supply environment. However, with redemptions expected to increase in the summer months, technicals are likely to weaken by September, presenting investors with an opportunity for a potentially cheaper entry point.
June Performance Recap
Tax-exempts experienced a rally last month, outperforming U.S. Treasuries on the back of strong June reinvestment and attractive muni-UST ratios. The Bloomberg Municipal Index posted a total return of 1.53% in June, surpassing the U.S. Treasury Index. Muni ratios saw a decline across different maturity periods, with issuance for June increasing compared to the previous year. Despite outflows from muni mutual funds, market momentum, Build America Bond refundings, and mega deals supported the growth in bond volume.
Various rating agencies have reported slight changes in their scales and yield curves for AAA-rated municipal bonds. Refinitiv MMD, ICE, S&P Global Market Intelligence, and Bloomberg BVAL have provided different yield figures for different maturity periods. The market for AAA-rated bonds continues to remain stable, with no specific sector standing out as particularly attractive at this time.
In contrast to municipal bonds, Treasuries witnessed firmer yields, with different maturity periods showing varying levels of changes. The performance of Treasuries has influenced the behavior of investors in the municipal bond market, with many seeking opportunities for better value amidst market fluctuations.
The municipal bond market is a dynamic and ever-changing environment influenced by a myriad of factors such as interest rates, market activity, and investor sentiments. Understanding these nuances is crucial for investors looking to navigate the complexities of the market and make informed decisions about their investment strategies. By staying informed about market trends, analyzing data, and seeking expert advice, investors can optimize their portfolio performance and achieve their financial goals in the ever-evolving landscape of municipal bonds.