(Bloomberg) -- The municipal-bond market is on track to slightly outpace Treasuries this month, benefiting from a broad fixed-income rally and a period that is typically strong for US state and city debt.

Munis are up 1.5% in June as of Thursday’s close, compared with 1.4% for US government debt, according to Bloomberg index data. Bonds have rallied this month as signs of cooling inflation supported bets that the Federal Reserve will lower interest rates this year. Both munis and Treasuries are still down a bit more than 0.4% in 2024. 

For munis, it’s set to be the best June since 2016. This month is often the beginning of a mid-year stretch where demand outstrips supply as investors recycle cash from calls and redemptions back into munis while issuers tend to sell less debt. 

“We took our cue from broader rate movements in the Treasury market,” said Eric Kazatsky, head of municipal strategy for Bloomberg Intelligence. The supply-demand relationship was “almost secondary to the rate rally this month.” He estimated that 70-80% of June’s return can be attributed to Treasuries.

June isn’t hinting at the start of a mid-year issuance lull. Deal volume of nearly $47 billion was the most for the month since 2021. June also brought the year’s 27th issue of $1 billion or more, a record for a single year as pent-up infrastructure demand and rising construction costs boost the megadeal count.

“Issuers are tired of waiting around seeing if rates are going to go down,” Kazatsky said. Cities and states are also eager to settle any debt needs before the November election, he said. 

Earlier this month, the largest weekly supply wave in more than two years briefly pushed muni yields up relative to those on Treasuries, but reinvestment demand buoyed the market.

“We really focused on adding munis to our portfolios,” said Debra Crovicz, a managing director and senior portfolio manager at Chilton Trust Co.

After losses the past two months, June’s strength may signal a more extended muni comeback, especially if issuance follows historical precedent and slows in July. July has seen negative muni returns only twice in the past 20 years, according to Kazatsky at BI.

“Municipal bonds are at a turning point, and we expect a sharp technical reversal,” said James Pruskowski, chief investment officer at 16Rock Asset Management. 

“Reinvestment demand is set to surge, and we foresee a wave of new capital entering the market,” he said. “For the past three months, patience has been key, but now it’s time to act.” 

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