Market Post: Reinvestment Will Start 'Food Fight' for Munis, Investors Say

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Demand for municipal bonds will remain high through May and June, investors predict.

"There's going to be a food fight for any issuance that is coming," a trader in Virginia said.

Issuance has remained low this year, totaling $89.34 billion as of April 30, compared to $122.7 billion for the same period in 2013. Investors see the buyside's hunger for municipal bonds remaining strong through May and June because those two months have historically been a period when investors choose to reinvest their cash.

"May and June are big reinvestment months," a trader in Pennsylvania said. "They are large reinvestment months and investors will put money to work if they can find bonds to put it to work in."

The trader said investors will be prompted to reinvest because May, June and even the later summer months are the time when they receive coupon payments and when bonds mature. When this is combined with strong municipal fund flows, he said it indicates demand for municipal bonds will continue to remain strong during the traditional reinvestment months.

Municipal fund flows have been positive 13 out of 19 weeks this year, according to Lipper FMI data.

"Lipper reported $94 million of inflows to municipal mutual funds this week, but putting these funds to work faces the headwind of low new issue supply, with next week's calendar looking to fall below $5 billion," Alan Shankel, managing director at Janney Capital Markets, wrote in a report released on Friday. "Demand will grow further as we enter the strong summer reinvestment (maturities and redemptions) months beginning in June."

Investors do say that strong demand in the next couple months may drive investors to pay even more for deals, even though the buyside has complained about issuances coming to market too rich.

An investor in New York said this is because many market participants have been sitting on cash reserves, hoping the market would sell off a bit.

"There have been a good amount of people sitting on the sideline, waiting to see which direction rates will go," he said. "They will have to start putting some of that money to work."

The trader in Virginia also said investors will have to start dipping into their cash piles.

"As a reinvestment period approaches, if [investors] can get their hands on new issuance, what they can get their hands on they may have to pay way, way up on," he said. "Many may pay prices they are not comfortable with."

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