Mutual funds

Municipal supply continues to grow as Bond Buyer 30-day visible supply sits at $20.02 billion and the municipal market will see one of the largest weeks of new-issuance at an estimated $13.35 billion, led by three billion-plus deals from Washington, D.C. ($1.6 billion), the New York City Transitional Finance Authority ($1.5 billion) and Illinois ($1 billion).

Municipal bond mutual funds saw inflows as investors added $956 million to funds after $1.047 billion of inflows the week prior, according to LSEG Lipper.

Most weeks in September are expected to see around $10 billion of issuance, which could easily grow if a prepaid gas deal is thrown into the mix, said Jason Appleson, head of municipal bonds at PGIM Fixed Income. Bond Buyer 30-day visible supply sits at $16.46 billion.

Investors will see more than $7.8 billion of supply to start off September, following a record issuance month in August. The calendar is led by the North Texas Tollway Authority's $1.126 billion of system revenue refunding bonds while high-grade Massachusetts leads the competitive slate with $850 million of exempt and taxable general obligation bonds.

The Investment Company Institute reported more than $1.3 billion of inflows into muni mutual funds. The last time inflows topped $1 billion, per ICI data, was for the week ending Feb. 7. LSEG Lipper has reported weeks with $1 billion plus inflows on July 31 and May 8.

The calendar next week largely continues "the elevated pace of primary market volume seen since May, against a backdrop of broadly supportive fund flows (LSEG inflows for eight consecutive weeks), somewhat better dealer positions (although still heavy), mid-August reinvestment to spend, but lighter late summer attendance," said J.P. Morgan strategists led by Peter DeGroot.

All eyes are on Jackson Hole and Fed Chairman Jerome Powell's speech this week, noted Cooper Howard, a fixed-income strategist at Charles Schwab.

The Investment Company Institute reported $839 million of inflows into municipal bond mutual funds for the week ending Aug. 7 after $442 million of outflows the week prior. Exchange-traded funds saw $680 million of inflows after $950 million of inflows the previous week.

"After a long-period of muni yields not being that attractive relative to corporates, that's starting to shift," Charles Schwab's Cooper Howard said.

Muni returns so far in August are in the black, with the Bloomberg Municipal Index at 0.53% this month and 1.04% year to date. High-yield continues to outperform with returns at 0.68% in August and 5.99% in 2024.

The past several trading sessions have seen "crazy volatility," said Jennifer Johnston, director of research of municipal bonds at Franklin Templeton.

Despite munis being mixed Thursday, the muni AAA yield curve remains inverted, said Taylor Huffman, a client portfolio manager at PTAM.

"While supply has been outsized over the last several weeks, the market has also seen outsized reinvestment demand over the last several months," said Nuveen strategists.

The high-yield sector continues to show strength, with inflows of $364.4 million for the week ending Wednesday, marking 13 straight weeks of inflows, according to LSEG Lipper.

Issuance has remained robust over the past two weeks, with Wednesday being a particularly busy day.

Municipal bond mutual funds saw outflows as investors pulled $498 million from funds after $16 million of inflows the week prior, according to LSEG Lipper. High-yield funds still saw inflows.

"It is hard to be overly excited about current valuations of tax-exempts relative to Treasuries; however, at tax-adjusted yields (using individual tax brackets), munis look quite attractive compared with other asset classes," noted Barclays PLC.

Municipal bond mutual funds saw small inflows as investors added $16.4 million to the funds after $154.4 million of inflows the week prior, according to LSEG Lipper.

"Even after this week's rally, absolute yields look attractive in the context of the trading range over the past three years, May's underperformance versus taxable fixed-income, and our longer-term projections for lower rates this year," J.P. Morgan strategists said.

Household ownership of munis — which includes direct ownership of individual bonds in brokerage accounts, fee-based advisory accounts and SMAs — rose to $1.779 trillion, up 0.3% from Q4 2023 and from 5.6% in Q1 2023.