Geopolitical tensions and a larger new-issue calendar will weigh on the muni market next week.
"Macro takes center stage again next week, with a full slate of inflation and manufacturing data poised to drive the rates narrative," said James Pruskowski, managing director at Hennion & Walsh. "The ceasefire offers tactical relief, not a durable resolution. Geopolitical risk remains a live input."
During the two-week ceasefire anything could still happen and a "blow up" would create significant volatility, said Kevin McGuigan, director at Municipal Market Analytics.
But if the ceasefire holds and there's no significant news on that into next week, the market could see a bit of stability, he said.
"If we get some stability from Iran, it'll provide some comfort to investors who have been buying through here as yields backed up," said Pat Luby, head of municipal strategy at CreditSights.
Elsewhere, market participants are aware of the pending change in seasonal support for the muni market, he said.
"Redemptions will be rising. Net supply is coming down. [It's] a market where it's difficult to get your hands on the right bonds at the right price at the right time. We've got a big calendar. A lot of our participants will be looking for reasons to participate rather than looking for reasons to stay away," Luby said.
The muni new issue calendar remains heavy next week — at an estimated $13.5 billion — with more reasons for supply being pulled forward, Pruskowski said.
The new-issue calendar is led by $2.3 billion of taxable general obligation bonds from New York City and $1.5 billion of taxable GOs from Hawaii.
With $3.8 billion of taxable issuance at the top of the calendar, it may not pressure tax-exempt yields as much as a $13.5 billion calendar might suggest, McGuigan said.
Furthermore, the slew of taxable deals will "wake up" many investors who have had very little opportunity to gain muni exposure. This may include insurance companies, which crave muni credit risk but don't have opportunities to access it, Luby said.
Barclays strategists feel "mildly optimistic" about the muni market outlook.
"It does not seem that rate volatility is completely behind us, valuations have also become less attractive and issuance might remain heavy enough," they said. "However, we still expect some marginal upside from current levels, although we don't believe that ratios will get close to their prewar levels any time soon."
Barclays strategists believe investors should continue adding — but only selectively and opportunistically — and J.P. Morgan strategists concur: "With rate volatility likely to persist and a challenging technical backdrop through at least May, we think the current environment presents an attractive window to add exposure on market dips ahead of what should be a more supportive backdrop as Middle East tensions eventually ease and summer reinvestment bolsters demand."
