The market will turn its attention to a rebound in supply and June 1 reinvestment cash this week.
June continues to appear "constructive" for munis, BofA strategists said.
"Overall muni market internals should remain strong and stable in June, and indeed in July and August as well," they said.
Barclays strategists, meanwhile, are cautious, "as the issuance pipeline is expected to stay heavy in the coming weeks.
"At the same time, tax-exempts appear close to fair value, if not modestly rich, relative to Treasuries, suggesting limited scope for near-term outperformance," they said.
This week will see continued stability, given the recent bumps on deals in the primary market last week and the lack of negative headlines about the war with Iran, said Elaine Brennan, executive director of the public finance department at Roosevelt & Cross.
Additionally, as a heavy reinvestment month and with heavy cumulative inflows into muni mutual funds, June will be a strong month, she said.
Supply accelerates this week. Issuance rises to an estimated $12.157 billion, with $9.501 billion of negotiated deals on tap and $2.656 billion of competitives, according to LSEG.
The Regents of the University of California leads the negotiated calendar with $1.14 billion of general revenue bonds.
The competitive calendar is led by Maryland with $800 million of general obligation state and local facilities loan bonds in three series.
There will be a lot of deals to choose from, meaning it's likely some deals might slip through the cracks a little bit, especially the smaller ones, said Justin Horowitz, senior portfolio manager at Birch Creek.
Underwriters will probably have to offer decent-sized concessions to get people to pay attention, he noted.
Record levels of tax-exempt supply have been "overwhelmed" by accelerating and sizable inflows of around $40 billion, the second-highest figure on record, said J.P. Morgan strategists led by Peter DeGroot.
Positive fund flows could even end up being the highest ever after monthly reporting funds for May come in, they said.
"Sustained fund inflows will be needed to absorb [the] expected elevated supply at current market levels," J.P. Morgan strategists noted.
Fund flow momentum seems to be "intact," even with the "volatile UST rate backdrop, given elevated taxable-equivalent yields and positive [year-to-date] fund performance, which has reinforced capital allocations into the sector," J.P. Morgan strategists said.
Lately, bond markets have "been about rates and yields and flows, and amazingly strong flows … haven't been able to counter the effect of rates," which is like a "gravitational force" in the muni market, said Sudip Mukherjee, senior fixed income strategist at UBS.
A lot of hawkishness is priced in currently as investor expectations have shifted toward rate hikes, an opportunity in the intermediate segment for Treasuries, which, in turn, support munis, he said.
This coincides with strengthening technicals, and if flows continue, then all the "ducks" are aligned on the road to facilitate performance, Mukherjee said.
The most important thing the market will see in June is the rise in redemption demand, he said.
June 1 reinvestment cash hits the market Monday. The summer months of June, July and August are a seasonally strong period for reinvestment cash, Horowitz said.
"So between that and just outsized fund inflows that we've seen over the last couple of weeks, the market will digest the calendar pretty well," he said.
