The municipal market appeared to be stagnant on Tuesday, with U.S. Treasuries showing firmness and equities exhibiting a mix of performance towards the end of the trading session. Despite this, muni yields remained consistent with levels observed at the beginning of the summer last year. Experts like Tom Kozlik of HilltopSecurities predict that yields could potentially decrease following the Federal Reserve’s communication of its policy goals in upcoming meetings.
Supply and Demand Dynamics
The municipal market has been witnessing positive trends in terms of mutual fund inflows, stable separately managed account demand, and declining yields despite a strong pace of tax-exempt issuance. With year-to-date issuance reaching $277.228 billion, which is a 3.13% increase year-over-year according to LSEG, the market is experiencing steady activity. However, as August approaches, issuance is expected to slow down as market participants take summer vacations, coupled with reduced supply due to the anticipation surrounding the November election.
The muni-to-Treasury ratios on Tuesday reveal a lukewarm scenario with ratios ranging from 65% to 84% for different maturity periods. According to Refinitiv Municipal Market Data and ICE Data Services, these ratios fail to present attractive buying opportunities, suggesting that the market might not witness significant fluctuations in muni paper valuation in the near future.
Despite the somewhat lackluster performance in muni ratios, there is evidence of robust demand in the form of institutional muni funds inflows. Experts like Chris Brigati of SWBC believe that the next demand phase could accelerate as rate easing expectations grow. He also emphasizes the importance of tax-exempt municipals in the current market conditions. The market is also benefiting from steady reinvestment funds for separately managed account portfolios, which is contributing to the market’s resilience.
In the primary market, significant bond issuances were observed, including GOs for New York City, revenue bonds for the Port of Portland, healthcare revenue bonds for Inova Health System, and senior lien revenue bonds for the Central Florida Expressway Authority among others. These bond offerings reflect the continued activity in the municipal market despite prevailing economic uncertainties and market conditions.
The yield curve for municipal bonds across different platforms such as Refinitiv MMD, ICE Data Services, S&P Global Market Intelligence, and Bloomberg BVAL remained relatively stable. However, Treasuries exhibited a firmer stance with yields showing a slight decrease across various maturity periods. The anticipated primary market activity, as evidenced by upcoming bond issuances, suggests that the market is poised for continued growth and stability in the near future.
While the municipal market may seem stagnated and lacking in significant changes, the underlying demand dynamics, stable yield curves, and consistent primary market activities indicate a resilient market environment. As investors navigate through uncertain economic scenarios and evolving interest rate landscapes, the municipal market continues to present opportunities and challenges that require careful consideration and strategic decision-making.