Munis face a manageable new-issue calendar and continued robust demand this week as the ceasefire between the U.S. and Iran seems broken.
This week, a "volatile news cycle related to Middle East events and upcoming CPI and PPI data will likely keep the market trading within a range in the near term," said Kim Olsan, senior fixed income portfolio manager at NewSquare Capital.
Even with geopolitical risks — which could lead to episodic spikes of volatility across financial markets — Barclays strategists remain "constructive" on munis and think the asset class can deliver solid returns through the end of the year.
However, they expect a more challenging backdrop than existed at the beginning of the year, which will be characterized by increased supply, interest rate uncertainty and richer valuations.
Issuance this week is an estimated $7.22 billion. There are $3.76 billion of negotiated deals on tap and $3.46 million of competitives.
The Aquarion Water Authority leads the negotiated calendar with $2.37 billion of water system revenue bonds.
The competitive calendar is led by the New York State Thruway Authority, with $2.44 billion of state personal income tax revenue bonds in six series.
The market doesn't seem to have too much trouble digesting the supply coming to market, and that's due to strong investor demand, said Chris Lanouette, a portfolio manager at CIBC.
And that demand has helped the market absorb a significant amount of issuance while generating positive returns, said Daryl Clements, a portfolio manager at AllianceBernstein.
The robust demand is expected to continue, "at least for the near term, as July and August mark the peak of summer redemption season and reinvestment demand, CreditSights strategists said.
That demand is one of several drivers supporting the muni market even in the wake of ongoing uncertainty around economic growth, inflation and interest rates, Clements said.
Concurrently, yields are still elevated and attractive after-tax income opportunities draw investor interest, Clements said.
Furthermore, seasonal reinvestment flows should offer an extra technical tailwind during the summer months, he said.
However, a reduction in redemption needs, and outflows from muni mutual funds, could put some pressure on the market, Lanouette said.
Currently, muni-UST ratios are very rich in the short end, and rich ratios will continue at least until "we get maybe closer to August, and again probably a lot of that [is] also just driven by how strong funds will have been," he said.
But even with ratios below their 90-day averages, "tax-exempt yields are roughly comparable to taxable muni and corporate bond after-tax yields (assuming the 37% federal income tax rate), and for double-exempt bonds in the higher tax states, muni yields become more compelling," CreditSights strategists said.
The strength of demand for munis due in 10 years or less is shown by the "efficiency of the tax-exempt vs [after-tax yield] curves, which also show incremental value that begins around 16 years, they said.
CreditSights strategists think investors should take advantage of elevated issuance, and "for those with flexibility, to consider extending into the less crowded part of the curve, but we see little incremental reason for most investors to look beyond 20 years."
