The muni market faces manageable supply this week as it contends with the ongoing situation in the Middle East and last week's hawkish
The market outlook is mixed, said Barclays strategists. "On one hand, a U.S.-Iran peace memorandum could help stabilize markets and put downward pressure on Treasury yields. On the other hand, [last] week's FOMC outcome was more hawkish than expected and late-June seasonals are typically less supportive for the asset class," they said.
Over the past week, munis were pretty insulated from financial markets' movements, largely ignoring the short-term U.S. Treasury selloff on Thursday after new Fed Chair Kevin Warsh's press conference and the strength in USTs and stocks after the MOU was signed Friday.
Headline risk remains elevated this week, even after an "orderly week" last week following Warsh's first FOMC meeting as chair and the interim U.S.-Iran peace deal, said J.P. Morgan strategists.
For the latter, the U.S. and Iran reportedly are making progress toward a lasting deal to end the war following the first day of negotiations between the two countries on Monday.
Even with this progress, there remains uncertainty in financial markets over the situation in the Middle East — including what's happening in Lebanon — and that has been weighing on investors, some of whom are taking a wait-and-see approach, said Tim Iltz, fixed-income credit and market analyst at HJ Sims.
Financial markets are facing a "roller coaster," and munis just tag along for the ride, depending upon technicals, said Peter Delahunt, managing director and head of the municipal bond department at StoneX.
Technically, the market is in a fairly decent position, while fundamentally, it remains strong away from the typical pitfalls of project finance, like Brightline, the American Dream Mall or charter schools, he said.
Munis are expected to perform broadly in line with the UST market in a "range-bound rates backdrop" this week, with $11 billion of tax-exempt supply on tap, though the calendar could still grow, J.P. Morgan strategists said.
Los Angeles leads the negotiated calendar with $1.442 billion of 2026 tax and revenue anticipation notes, followed by the Black Belt Energy Gas District with $1 billion of gas project revenue bonds.
The competitive calendar is led by Georgia with $1.571 billion of general obligation bonds across five series.
There is a rush to get deals done ahead of fiscal yearend, and that's creating some of the best concessions of the year, said James Pruskowski, managing director at Hennion & Walsh.
Over the next few weeks, supply should remain "manageable," though July is expected to be relatively heavy, Barclays strategists said.
Munis have performed well this year relative to other forms of fixed income, said Simeon Wallis, CIO of Aprio Wealth Management.
"Coming into the year, expectations were just lower than other markets and as a result, expectations for interest rates [have] not really come to fruition," he said.
Munis have performed better, and market participants tend to chase performance, according to Wallis.
Therefore, the muni market should continue to see positive fund flows, because it's performing well, and people want to be part of that, he said.
The setup for munis hasn't looked this good in years, Pruskowski said.
"Higher rates are generating their own demand, peak inflation signals are becoming more credible, long only investors not trading accounts are in the driver's seat, and summer seasonals are right around the corner," he said. "Patient capital gets paid here and I think people are going to look back at this entry point and wish they had done more."
