(Bloomberg) -- The municipal market is set for its best third quarter since 2011, with a return of about 2.6% during the three-month period.
As the Federal Reserve begins cutting interest rates, investors are snapping up the bonds to lock in the higher yields offered by the securities while they still last.
The rally comes despite a surge in new bond sales, an instance that would typically pressure prices. Issuance in September totaled nearly $46 billion, the second-highest total for the month since at least 2013, according to data compiled by Bloomberg. Despite that, the muni market is poised to see a gain of 0.9% during the month, marking the best performance for a September since 2013.
“The Fed view and the rate view has overtaken some of the concerns on supply,” said Ryan Henry, a municipal strategist at FHN Financial.
He said the muni market’s strong performance in September was particularly surprising given the market was no longer benefiting from a surge of reinvestment demand. In the summer, the muni market sees support from investors looking to reinvest principal and interest payments. September is usually one of the worst months for performance in the state and local debt market.
“It’s really surprising just how well the new issue deals are doing,” Henry said. He added that a continued uptick in supply could still pose a drag on performance.
Continued inflows into mutual funds and ETFs has helped absorb the massive wave of new issues this year. And compared to other fixed-income securities, munis are looking like a good bargain.
“You’re in this weird situation where spreads are actually quite tight, but the relative value that is muni rates relative to taxable rates or Treasury rates looks interesting,” said Jason Appleson, head of municipals at PGIM. “It’s this new dynamic we’re in. And the question is how will it look going forward?”
Bank of America Corp. strategists said in a Sept. 20 report the rally could pick up in the last two months of the year as there is less supply. Barclays municipal strategist Mikhail Foux is expecting another four to five weeks of “heavy supply” for the market.
“It would be hard not to expect tax exempts to underperform at least to a degree. However, we think many market participants are intending to buy the dip, thus we would not be surprised if munis do relatively well before November,” he wrote in note published Friday. “There is a certain aura of invincibility around munis at the moment.”
©2024 Bloomberg L.P.
