The municipal bond market experienced a mixed day on Wednesday, with noticeable selling pressure on the short end. This pressure was a result of few substantial deals being priced in the primary market, and the absorption of balances from the previous day’s significant new-issues. Despite this weakness in the market, municipal bonds have generally held up well, according to Steve Shutz, a portfolio manager at Brown Advisory. Specifically, the muni AAA HG curve has remained relatively stable throughout the month of March, with most parts of the curve near year-to-date highs. J.P. Morgan strategists noted that absolute yields in the muni market are attractive compared to historical trading ranges.
The muni-to-Treasury ratios on Wednesday showed a discrepancy between various maturities. Refinitiv Municipal Market Data and ICE Data Services both reported numbers for different maturity levels, with the 30-year ratio showing the highest percentage. J.P. Morgan strategists pointed out that the ratios in the muni market have shifted towards the middle of the range over the past few years, indicating relative richness in certain parts of the yield curve. They suggested that the long end of the tax-exempt market provides the most value, with 30-year AA tax-exempts appearing in the middle of the trailing three-year range. Additionally, they anticipated underperformance in March and April due to less favorable technical conditions.
Ben Barber, the director of the Municipal Bonds Department at Franklin Templeton, expressed optimism regarding technical factors in the tax-exempt market. He highlighted the strength in supply and demand dynamics, pointing out that primary issuance has been robust this month. The Bond Buyer reported a significant visible supply, with high expectations for new issues, particularly billion-dollar pricings like California’s $2.6 billion GOs. Barber also mentioned the potential increase in Build America Bond refundings, despite legal uncertainties. He noted that the oversubscription of deals in both high-grade and lower-quality segments of the market has been consistent week-over-week, indicating strong demand.
Demand for municipal bonds continues to surpass supply, especially among separately managed account buyers. Shutz noted that deals are being well subscribed for in the secondary market, indicating sustained investor interest. The Investment Company Institute reported continued inflows into municipal bond mutual funds, marking 11 straight weeks of positive investor activity. Despite some outflows in exchange-traded funds, the overall trend has been favorable for municipal bonds. In the competitive market, the Santa Clara Unified School District in California successfully sold GO refunding bonds to Morgan Stanley, reflecting ongoing investor appetite for municipal debt.
Various sources provided differing yields for AAA-rated municipal bonds, with cuts observed in some maturity levels. The S&P Global Market Intelligence municipal curve exhibited mixed changes, while Treasuries were firmer during the trading day. The performance of municipal bonds in comparison to U.S. Treasuries remains a point of interest for investors, as market conditions and economic indicators continue to influence decision-making.
The municipal bond market has faced challenges and opportunities in recent trading sessions. While there are concerns about underperformance in the near term, the overall attractiveness of the tax-exempt market and favorable technical factors provide reasons for cautious optimism. Investors are closely monitoring market dynamics and adjusting their strategies accordingly to navigate the uncertainties of the current economic landscape.