Investors believe that a flurry of municipal fund inflows this year shows demand for municipal bonds will stay high during tax season.
Municipal funds reported inflows for the sixth consecutive week in the week ended March 20, according to Lipper FMI data. The influx marked the ninth week out of ten that mutual funds have reported inflows. Some strategists think the trend shows investors will continue to look to municipal bonds during tax season, a typically low-demand time period.
"Muni funds continue to report modest inflows. While concerns remain about seasonal weakness due to tax season, we believe the munis can perform well if the supply/redemption dynamic remains favorable," Barclays said in a report released on Friday.
Muni bond mutual funds added $107 million to accounts in the week ended March 20, compared with $223 million the previous week. Inflows have been mostly positive in 2014, with only three weeks of outflows reported.
New bond sales, which participants don't expect to increase within the next few months, will keep demand for existing bonds strong throughout tax season, analysts said. "Tax season" lasts from mid-March to mid-April, when taxes are due.
"Issuance might increase late this year, or sometime next year," Dan Heckman, fixed income strategist at US Bank, said in an interview. "Probably in 2015, not 2014."
Total issuance for January and February was down roughly $18 billion from a year earlier, according to The Bond Buyer data. There were $33.7 billion of new bonds in those two months, compared with $51.7 billion in 2013.
"The market is on track for a month of positive net supply, but the magnitude is smaller than it has historically been in March," Barclays said in the report. "Furthermore, the large negative net supply in January and February will be supportive of new issuance. Longer term, supply may stay modest."
Thirty-day visible supply according to The Bond Buyer data was just $6.29 billion as of Friday.
Next week's total potential volume is projected to be $4.66 billion, up from this week's $3.18 billion, according to Ipreo and The Bond Buyer.
Treasury yields were lower Friday afternoon, as the 30-year yield fell seven basis points to 3.60% and the 10-year benchmark slid three basis points to 2.75%. The two-year note was unchanged at 0.44%.
