Munis are set to face another week of heavy supply, as inflows into muni mutual funds are expected to continue amid ongoing geopolitical tensions and the release of a key inflation report.
Munis should do "relatively well" this month, as investors will "focus on heavy summer redemptions; tax-exempt supply should remain healthy, but is unlikely to overwhelm," said Barclays strategists.
Issuance remains robust this week at an estimated $12.353 billion, with $10.407 billion of negotiated deals on tap and $1.946 billion of competitives.
There was a "fair amount" of bid-wanted activity last week, so investors might have been prepping for some of this, said Tim McGregor, managing partner at Riverbend Capital Advisors.
Big headline deals and all kinds of $50 to $100 million deals are "in the weeds" as well, he said.
The negotiated calendar includes four mega deals, led by the Airport Commission of the City and County of San Francisco, with $1.179 billion of second series revenue refunding bonds.
The other three $1-plus billion deals are the Dormitory Authority of the State of New York with $1.174 billion of school district revenue bond financing program bonds, Connecticut with $1.12 billion of GOs, and Atlanta with $1.102 billion of water and wastewater subordinate lien revenue and revenue refunding bonds.
However, some of the mega deals, like Connecticut and Atlanta, may need a bigger concession than usual to clear, McGregor said.
The competitive calendar is led by Fairfax County, Virginia, with $341.695 of sewer revenue bonds in two series.
The large supply this week brings J.P. Morgan's May forecast to $45 billion, which would be the third-largest issuance figure for the month, per LSEG.
This implies over $5 billion of net supply in the first half of May, taking year-to-date net volume over $31 billion, J.P. Morgan strategists said.
"Even so, valuations have held at rich levels and long-end ratios are at one-year lows, supported by near-record inflows of [around] $33.5 billion, and even that figure is likely understated due to incomplete April reporting and uncounted demand from [separately managed accounts], as well as more mixed activity from banks and insurance investors," they said.
Continued inflows are needed to sustain current pricing. "Flow momentum appears supported by solid [year-to-date] NAVs, but our risk appetite would increase if outflows materialize ahead of stronger summer reinvestment," J.P. Morgan strategists said.
Fixed income market movements continue to be strongly tied to the expected Iran conflict resolution, said Elaine Brennan, executive director of the public finance department at Roosevelt & Cross.
These geopolitical events are driving bond markets rather than the Federal Reserve or other domestic factors. This should continue until there's a resolution, said Christian Hoffmann, head of fixed income at Thornburg Investment Management.
Tuesday will see the release of the consumer price index report, which is expected to climb 0.6% in the headline number and 0.4% in the core. This is another reason for Treasury investors to be a little cautious, McGregor said.
Inflation is not going to be anywhere near the Fed's 2% preferred inflation target in the near future, he said.
Expectations for further Fed rate cuts this year have been largely dispelled, said Brennan, noting it's important to keep an eye on incoming Fed Chair Kevin Warsh's policy and economic data, as inflationary pressures may warrant a rate hike later this year.
