Crossover buyers attracted by "magic" 5% high-grade, long-dated municipal bond yields may help digest supply that is expected to remain elevated throughout the year, said muni buyside panelists at The Bond Buyer's Infrastructure conference this week.
The 30-year MMD yield last Thursday hit the highest since 2011, translating into taxable equivalent yields of around 8%, panelists said.
"You're looking at equity-like returns and that attracts money," said Mark Paris, Invesco's chief investment officer and head of municipals. "You're talking about yields that matter."
Insurance companies and banks are now stepping into the market, Paris said. "That's going to continue to lend a demand component to deals."
Ron Banaszek, executive director and head of public finance and underwriting at Blaylock Van, agreed.
"Where we are on rates right now, that 5% magic number ... I do think that will attract a new set of investors," Banaszek said. "Crossover buyers can be huge and it might be coming along at an opportune time."
September and October are typically lower reinvestment months, Banaszek noted, and supply is expected to remain heavy ahead of the midterm elections.
"So having a potential new set of eyes on the market could be a good thing," he said.
After a strong year, the muni market hit headwinds in July, then mounted a partial recovery in August before hitting the skids in September and erasing the year's gains, panelists said.
Since the end of June, long-dated muni yields
Primary market demand has remained strong, and many deals have been oversubscribed. That includes last week's
That shows there "is liquidity out there," Kleinman said. "People do want to put money to work," she said, adding, taxable equivalent yields of over 8% "are pretty attractive."
Inflows into muni mutual funds have topped $60 billion this year. "We're still seeing that resiliency, especially among [exchange-traded fund] flows," she said.
Separately managed accounts continue to show "insatiable demand," especially in the 10-year part of the curve, said Paris.
Issuers are tracking SMA demand as seen by issuance in the 6- to 10-year maturity bucket, which is up 30% year-over-year, said Kleinman, citing JPMorgan data.
"Issuance longer out on the curve is actually down," she said. "It seems like the issuers are taking notice of where the flows are going and where the demand is and structuring their deals accordingly."
The market selloff can be blamed on volatile Treasury rates, not credit concerns, panelists said. On Monday, the 10-year Treasury benchmark yield rose above 5%.
"The municipal market is a great credit market with a major Treasury rate problem," Paris said. A move by the
The record volume flooding the muni market the last three years is likely the new normal as project costs continue to rise and the country's infrastructure needs are not going away, panelists added.
