The municipal bond market felt the pressure of a U.S. Treasury market selloff, but surprisingly outperformed their taxable counterparts. This outperformance can be attributed to investors flocking to equities in a risk-on trade after better economic data was released. Despite the uptick in yields, triple-A municipal bond yields rose only two to four basis points, depending on the yield curve. In contrast, U.S. Treasuries saw losses of up to 15 basis points on the short end, leading to a decrease in municipal to UST ratios in that area. This shift resulted in lower muni to UST ratios after the day’s moves, with various ratios ranging from 64% to 86% based on different tenors.
Despite the market turmoil, municipal bond mutual funds saw significant inflows, with investors adding $528.7 million after $674.1 million the previous week. This marks seven consecutive weeks of positive inflows, indicating sustained investor confidence in the municipal bond market. High-yield municipal bonds also continued to demonstrate strength, with inflows of $230.6 million following a robust performance in the previous week.
Primary Market Activity
In the primary market, the final large deals of the week priced and in some cases, were even upsized. Notable deals included the Triborough Bridge and Tunnel Authority’s $699.405 million MTA Bridges and Tunnels Revenue Bonds deal, the New Jersey Health Care Facilities Financing Authority’s $251.570 million Inspira Health Obligated Group Issues revenue and refunding bonds, and the Reno-Tahoe Airport Authority’s $240.88 million airport revenue bonds. These deals reflect strong investor demand for municipal bonds, despite the broader market volatility.
The Bond Buyer 30-day visible supply grew to $17.64 billion just as investors began to digest an influx of reinvestment cash hitting the market. The influx of cash is expected to boost demand in the 1-10 year portion of the market, with that sector seeing limited support in recent weeks. Market analysts anticipate further opportunities for buying bonds in the fall, as weaker election-related municipal market technicals may create favorable pricing conditions.
AAA scales across various municipal bond indices showed slight fluctuations in yields, with Refinitiv MMD, ICE, S&P Global Market Intelligence, and Bloomberg BVAL all adjusting their scales. Despite these adjustments, municipal bonds maintained their resilience compared to U.S. Treasuries, which experienced a selloff across different tenors. Market participants are closely monitoring the market dynamics, particularly the slope of the yield curve and the rate outlook in the coming months.
The municipal bond market demonstrated remarkable resilience in the face of a U.S. Treasury market selloff. Despite facing pressure from rising yields, municipal bonds outperformed their taxable counterparts and experienced strong investor demand. The primary market remained active, with several large deals pricing successfully. With supply dynamics evolving and investor sentiment remaining positive, the municipal bond market is poised for continued stability and potentially attractive buying opportunities in the near future.