The municipal market experienced minimal changes on Tuesday as the U.S. Treasuries showed signs of firmness and equities displayed a mixed performance towards the end of the trading session. Despite this, municipal yields have remained relatively stable, reflecting levels similar to those observed at the beginning of the previous summer. Tom Kozlik, the managing director and head of public policy and municipal strategy at HilltopSecurities, suggested that there could be a potential downward movement in yields following the Federal Reserve’s announcement of policy adjustments in the upcoming meetings. This anticipation of lower yields has generated cautious optimism among market participants, with Matt Fabian, a partner at Municipal Market Analytics, highlighting positive trends such as stronger mutual fund inflows, robust separately managed account (SMA) demand, and declining yields despite substantial tax-exempt issuance.
The year-to-date issuance in the municipal market stands at $277.228 billion, representing a 3.13% increase compared to the same period last year, as reported by LSEG. As August approaches, a seasonal slowdown in issuance is expected due to market participants taking summer vacations, coupled with reduced supply ahead of the November election. According to Chris Brigati, senior vice president and director of strategic planning and fixed-income research at SWBC, this decrease in new issuance, along with the impact of the upcoming election, is likely to prevent munis from experiencing significant price declines.
The muni-to-Treasury ratios on Tuesday were relatively stagnant, with the two-year ratio at 65%, the three-year at 67%, the five-year at 68%, the 10-year at 68%, and the 30-year at 84%, according to Refinitiv Municipal Market Data. These ratios, according to ICE Data Services, continue to hover at levels that do not present attractive buying opportunities, as noted by Brigati. The primary source of demand in the municipal market has been institutional funds, indicating a lack of robust and consistent interest from retail investors. However, Kozlik suggested that the next phase of demand could materialize as expectations of interest rate cuts intensify.
Despite recent inflows into muni mutual funds and exchange-traded funds, investor sentiment remains positive, particularly towards long and high yield strategies. The consistent reinvestment of funds into SMA portfolios has bolstered demand in the market, as indicated by Fabian. Retail muni allocations are expected to benefit from recent equity price volatility, presenting potential opportunities for investors. Looking ahead, August is anticipated to witness a surge in reinvestment dollars, which could further support the market amidst potential yield fluctuations.
In the primary market activity observed on Tuesday, notable pricing included Wells Fargo’s placement of $1.105 billion of general obligation bonds for New York City, BofA Securities’s issuance of $589.6 million for the Port of Portland, and J.P. Morgan’s pricing of $368.245 million for the Inova Health System Project in Virginia. These offerings reflect varying maturities and yields, catering to different investor preferences and risk appetites. Additionally, competitive sales from municipalities such as Miami-Dade County, Florida, and New Orleans are set to provide further opportunities for market participants.
While the municipal market continues to navigate through periods of uncertainty and fluctuation, the impact of Federal Reserve policies and market dynamics play a crucial role in shaping investor behavior and market sentiment. Anticipated changes in interest rates and investor preferences are likely to influence issuance trends and pricing activities in the municipal market, highlighting the importance of staying informed and adaptable in an evolving financial landscape.