As the month came to a close in 2024, the municipal market appeared relatively calm, with minimal activity ahead of the Fourth of July holiday-shortened week. Despite a new-issue slate totaling a modest $240 million, there were significant developments to observe on the sidelines. Munis demonstrated resilience compared to U.S. Treasuries, holding steady while government bond prices experienced losses. Equities also saw a decline following the release of May personal consumption data, further reinforcing expectations of future Federal Reserve actions.
Implications of Economic Data
The analysis of May PCE inflation data by Mercatus Center macroeconomist Patrick Horan revealed that inflation, though gradually declining, still exceeded the Fed’s 2% target. Horan expressed his belief that the recent data would not prompt immediate interest rate cuts by the Fed, suggesting that any potential adjustments were more likely to occur after September. As John Kerschner, head of U.S. Securitised Products at Janus Henderson Investors, highlighted, the market now signals a potential rate cut during the Fed’s September 18 meeting. While Fed officials may emphasize their data-driven approach, Kerschner and others anticipate a shift towards rate cuts later in the year.
The recent U.S. presidential debate between Joe Biden and Donald Trump did not elicit significant reactions from the markets. The polarization of the U.S. electorate may lead to discussions about revising investment portfolios, as noted by UBS Global Wealth Management’s chief investment Officer Americas, Solita Marcelli. However, Marcelli cautioned against making hasty financial decisions based on a single debate, emphasizing the importance of maintaining a long-term perspective.
Recent U.S. Supreme Court decisions, particularly those relating to SEC proceedings and federal agency regulations, could impact the public finance industry in the near future. The legal landscape remains uncertain, with implications for enforcement mechanisms in the market. Despite regulatory shifts, market participants have navigated challenges successfully, as seen in the muni market’s ability to absorb substantial new issuance in June. Total issuance volumes in the first half of 2024 exceeded previous year levels by over 30%, indicating robust market activity.
Barclays PLC strategists highlighted the increase in Treasury yields driven by heavy auctions and currency fluctuations. Despite these shifts, tax-exempt yields remained aligned with USTs. BofA Global Research analysts recognized the muni market’s resilience through a demanding primary market in June, maintaining stable muni-to-Treasury ratios. As supply and demand dynamics shift in favor of bond investors, opportunities arise for strategic positioning in the market.
Looking ahead into July, analysts anticipate robust bond issuance, offset by significant principal redemptions and coupon payments. The muni market’s current hesitance presents an opportunity for investors to enter positions ahead of an anticipated 100-basis-point rally in the second half of 2024. While market conditions remain volatile, technical factors are expected to support continued growth, even amid rising yields.
Returns on municipal investments varied across sectors, with high-yield segments outperforming their peers in June and year-to-date. Taxable munis demonstrated positive returns for both periods, contrasting with AAA-rated munis that faced challenges despite recent market movements. As market indices reflected, municipal assets showed mixed performance, with opportunities emerging in select areas for investors seeking strategic positions.