As the largest deals of the week priced and with over $1 billion of inflows into municipal bond mutual funds, the municipal market remained mostly steady. Despite the little change in muni yields on Wednesday, there has been a consistent decline in yields since the start of the summer. Tom Kozlik, managing director at HilltopSecurities, noted that while yields are not as attractive as they were earlier this year, they still remain at historically appealing levels.
The Investment Company Institute reported inflows into muni mutual funds exceeding $1 billion for the week ending August 21, signaling continued interest in this sector. Even though these inflows are significant, they are still below the average amount seen in 2021, when total inflows surpassed $100 billion. In comparison to corporate bonds and Treasuries, municipal bonds continue to offer value to investors. Cooper Howard, a fixed-income strategist at Charles Schwab, pointed out that the all-in tax rate for munis and corporate bonds is near the lower end of the range in recent years, making munis an attractive opportunity for higher-tax bracket investors.
Looking ahead, with the Federal Reserve likely to cut rates in the upcoming months, the yield curve is expected to steepen. However, there is uncertainty about whether the rate cut at the September meeting will be 25 or 50 basis points. Federal Reserve Chairman Jerome Powell’s recent speech indicated a strong possibility of rate cuts in the near future, leading to expectations of continued easing throughout the year. The market will closely monitor economic indicators like jobless claims and PCE data to assess the health of the labor market and inflation trends post-Fed actions.
In the primary market, notable deals were priced towards the end of the week. Wells Fargo priced nearly $1 billion of Chicago O’Hare International Airport general airport senior lien revenue bonds, while J.P. Morgan priced over $700 million of electric and gas systems revenue refunding bonds for San Antonio, Texas. Other deals from entities like the Utah Transit Authority and the University of Kentucky further highlighted the continued activity in the municipal bond market.
Various market indicators, such as those from Refinitiv MMD, ICE AAA, S&P Global Market Intelligence, and Bloomberg BVAL, showed little change in the yield curve on Wednesday. Treasury yields also remained relatively stable, with slight movements in different tenors. The overall market sentiment appears cautiously optimistic, with a focus on upcoming economic data releases and the impact of potential future rate cuts on municipal bond yields.
The municipal bond market continues to attract significant investor interest, with inflows into mutual funds and steady pricing of new issuances. While yields have declined from earlier levels, munis remain an attractive option compared to other fixed-income assets. As the market awaits further guidance from the Federal Reserve and monitors economic indicators, the outlook for municipal bonds remains positive in the current environment of historically low interest rates.