As U.S. Treasury yields experienced a rise and equities closed in the red on Thursday, the municipal bond market remained relatively stable. According to AllianceBernstein strategists, the technical picture for munis this summer has been notably stronger compared to the same period in 2023. Last year, total returns for June through August were reported at -0.04%, with August wiping out gains from the previous two months as UST yields surged and muni yields followed suit. In August 2023 alone, the 10-year muni saw a spike of 36 basis points, reflecting the volatility in the market during that time.
Contrary to the challenges faced in 2023, municipal bonds have shown resilience this year with returns of 3.11% from June through August 16th. This performance is stronger than the previous year’s despite an increase in issuance volume, as issuers strategically frontloaded their offerings ahead of November to avoid election-related market fluctuations. Despite a slowdown in issuance on Thursday following a busy primary earlier in the week, the market has absorbed the influx of supply relatively well. Notable deals, such as the $1.8 billion of GOs issued by New York City, have contributed to the market’s stability.
One of the key factors supporting the municipal bond market’s constructive environment is the presence of attractive yields. While yields remained relatively unchanged on Thursday, they are currently higher compared to previous levels. This presents an appealing opportunity for high-net-worth individuals to capitalize on these elevated yields. Catherine Stienstra, the head of municipal bond investments at Columbia Threadneedle Investments, highlighted the growing interest in separately managed accounts (SMAs) as a result of the prevailing yield environment. SMAs have been actively acquiring most of the supply within the 15-year maturity range, indicating strong demand driven by favorable muni-UST ratios.
Despite the ongoing inflows into muni mutual funds, the pace has been slower than anticipated following significant outflows in 2022 and 2023. Recent data from LSEG Lipper showed eight consecutive weeks of inflows into municipal bond mutual funds, with a notable interest in high-yield products. The anticipation of a Federal Reserve rate cut has created some uncertainty in the market, with investors closely monitoring the FOMC’s upcoming decisions. The Fed’s stance on potential rate cuts, particularly in the context of economic data like the monthly employment report, will play a crucial role in shaping market sentiment moving forward.
In the primary market activity on Thursday, notable bond pricing and issuance took place. Wells Fargo priced a significant amount for Dallas and Fort Worth, Texas, while BofA Securities handled the pricing for the Los Angeles County Public Works Financing Authority. Additionally, Charlotte, North Carolina, saw bond pricing from Wells Fargo for stormwater fee revenue refunding bonds. Yield trends remained relatively stable across various scales, with minor adjustments in rates reported during the day. Treasuries also showed firmness, with yields on different maturity USTs experiencing slight movements.
The municipal bond market in 2024 showcases a mix of resilience and adaptability amid changing economic conditions and market dynamics. While challenges persist, including rising issuance and uncertainty around Federal Reserve actions, the attractiveness of muni yields and investor interest in the market remain strong. As the year progresses, it will be essential for market participants to stay vigilant and responsive to emerging trends to navigate the evolving landscape of municipal bonds effectively.