The municipal bond market experienced weakness on Thursday as U.S. Treasury yields saw an increase and equities rallied. This rise in Treasury yields led to a two to seven basis points increase in Triple-A yields, while USTs saw a four to five basis points rise. Jennifer Johnston, the director of research of municipal bonds at Franklin Templeton, highlighted the “crazy volatility” that has been witnessed in both markets over the past few trading sessions. Despite undergoing a market rally followed by a selloff, the market is almost back to its initial position. However, the uncertainty prevails regarding whether the market will continue on this trajectory. Various factors such as the upcoming Federal Open Market Committee meeting, the employment report, and unexpected turns in the presidential election have contributed to the heightened market volatility in August.
Johnston emphasized the unique political environment characterized by uncertainty and volatility due to events such as the assassination attempt on former President Donald Trump and the withdrawal of President Joe Biden from the race. This unprecedented situation has created a sense of unease among investors, not just about the election outcome but also about how this climate of uncertainty and divisiveness will impact the market leading up to the November elections. The market volatility has already resulted in Chicago withdrawing its planned deal of $643.11 million of General Obligation bonds. Johnston suggested that more issuers might postpone their deals to allow the market to stabilize. As the Federal Reserve’s September meeting approaches, the issuance is expected to slow down, but in the meantime, issuers are likely to cautiously monitor market demand.
Despite the rise in yields, Johnston noted that there is still relative value to be found in bonds with maturities of 10 years and below. Municipal to UST ratios have remained within a certain range, showing that even with the current fluctuations, there are opportunities for investors in the market. The recent inflows in high-yield municipal bond mutual funds have been viewed positively as a sign of investors’ confidence. The influx of funds into the market has been aided by the possibility of the Federal Reserve lowering rates, which could attract traditional investors back into open-end funds.
In the primary market activity on Thursday, various bonds were priced by notable institutions such as J.P. Morgan, Wells Fargo, Frost Bank, and Goldman Sachs. Offerings ranged from Aviation Authority revenue bonds to Project special revenue bonds to unlimited tax school building bonds. These bond issuances reflect the ongoing demand for municipal bonds despite the current market challenges and uncertainties. Additionally, competition in the bond market has led to a fair amount of fluctuation in yields as different institutions price their offerings.
The yield curve for municipal bonds displayed varying trends with cuts observed in different points. This indicates the ever-changing nature of the market and the dynamic interplay between Treasury yields and municipal bond yields. Despite the challenges posed by the rising Treasury yields, the municipal bonds market continues to attract investors, and the recent inflows signify a positive sentiment among market participants. As the market navigates through the current volatility, it remains crucial for investors to stay informed and adaptable to make well-informed decisions.