Munis will see a dip in supply this week due to the holiday and the Federal Open Market Committee meeting, while demand remains intact.
Munis are expected to "follow through with the U.S. Treasury rate rally, if it holds, given the holiday-stunted … supply," said J.P. Morgan strategists led by Peter DeGroot.
Supply has been robust in June, but issuance falls to an estimated $8.137 billion this week.
There are $5.396 billion of negotiated deals on tap and $2.741 billion of competitives, according to LSEG.
Miami-Dade County, Florida, leads the negotiated calendar with $637.865 million of aviation revenue refunding bonds, followed by the New York State Housing Finance Agency with $509.62 million of affordable housing revenue bonds.
The competitive calendar is led by Washington with $1.524 billion of general obligation bonds in four series.
Last week saw fund inflows decelerate to $624.6 million, but year-to-date inflows of $48.2 billion remain the second highest on record for the period, J.P. Morgan strategists said, citing LSEG Lipper data.
"Sustained fund inflows will be needed to absorb expected elevated supply at current market levels," they said.
Fund flow momentum seems likely to remain "intact" if USTs hold around current levels, "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.
Part of the sizable inflows is a reflection that people tend to chase where performance has been, said Simeon Wallis, CIO of Aprio Wealth Management.
Performance started off strong this year, especially coming off last year, which began weaker than expected.
Munis are returning 0.21% month-to-date, bringing year-to-date returns to 1.56%. USTs are seeing gains of 0.11% MTD and 0.11% YTD, while corporates are seeing positive returns of 0.05% MTD and 0.72% YTD.
"We would expect to see [inflows] until we start to see the broader bond market catch up in terms of performance," Wallis said.
Supply and flows are "coming down a little bit [lately], so I feel like gravity is starting to take effect on the market and it's just going to pull it back," according to Jude Scaglione, director and head of fixed income portfolio management at A&M Private Wealth Partners.
This week features a FOMC meeting where the Federal Reserve is expected to hold rates steady.
Market pricing has turned more "hawkish," with fed funds futures implying the next move is a hike, potentially by December, said Barclays strategists.
The June meeting will also be Kevin Warsh's first as Fed chair, and his post-conference press conference will be closely watched for "signals on the policy reaction function," they said.
Overall, "we remain cautious," Barclays strategists said of the muni market.
Late June is usually a weaker seasonal window for munis. "Valuations are stretched, supply is likely to remain elevated, and inflows have begun to moderate," they said.
Barclays strategists said there will be attractive entry points later in the summer and "prefer to maintain dry powder to deploy at better levels."
