Christine Albano

Gross underwriting spreads rose slightly for the first time in 2023 after both trending lower for nearly the last 15 years and hitting a 20-year low last year on increased competition, lower issuance and use of technology.

"The recent outperformance has valuations nearing stretched levels again," Birch Creek Capital said in a weekly report. "If USTs reverse the recent trend higher, we would not be surprised to see munis lag during the rally."

While triple-As were little changed the past two sessions, some damage was done last week, leaving market participants generally less optimistic for the final weeks of August.

Less volatility, sustained credit quality and attractive yields should prevail in the second half of 2023, muni experts said.

With the third quarter officially under way, municipal bond experts say the tax-exempt market is poised for better performance and stronger market technicals ahead in the second half.

This week should see a return to more normal supply, which might be a little higher than average for the year so far, said Daniel Solender, partner and director of tax-free fixed income at Lord Abbett & Co.

The fund aims to provide capital preservation and use hedging strategies designed to minimize interest rate, event and directional risk.

With the first half of the year ending on Friday, municipal sources say the second half of the year will be off to a good start.

The Investment Company Institute reported investors added $16 million to municipal bond mutual funds in the week ending June 14, after $495 million of inflows the previous week.

Those "holding out for wider yields or relative value" are frustrated due to an extremely tight muni range, but FHN Financial's Kim Olsan said, "the reality is that supply has yet to materialize to force that change."

The firms said the acquisition allows both to leverage each other's products and resources to expand their client bases and capabilities.

"June started out fairly strong for the municipal market as the relative cheapness attracted investors looking for an opening to start buying bonds at higher yields," said Roberto Roffo, managing director and portfolio manager at SWBC Investment Company.

Reinvestments, which includes maturities, called bonds and coupons, total over $114 billion over the next four months, according to ICE Data.

Fernandez was a veteran municipal bond attorney who spent nearly 67 years at Hawkins, Delafield & Wood LLP before his retirement in 2017.

Outflows were seen again from municipal bond mutual funds, though they lessened this week as Refinitiv Lipper reported $101.664 million was pulled as of Wednesday.  

Despite the attraction for new issues, sources said there is still uncertainty overall in the municipal market stemming from the regional banking crisis.

The secondary was quiet and the sole deal of size came from a $400 million-plus competitive water and sewer loan from Portland, Oregon. The recent rise in yields makes for more compelling levels.

Use of technology and increased communication tools as well as transforming their digital presence won five issuers recognition from the firm.

JPMorgan's move to acquire First Republic and its muni portfolio eases the risk of nearly $20 billion of munis flooding the market.

The Investment Company Institute reported investors pulled $377 million from to mutual funds in the week ending April 12, after $229 million of inflows the previous week.