Securitization

"A victory for former President Trump is likely to be viewed as ushering in a more inflationary environment, whereas a win for Vice President Harris will probably be seen as closer to the status quo," said Erik Weisman, chief economist and portfolio manager at MFS Investment Management."

Investors should "brace themselves" for further volatility, as uncertainty is likely to remain, said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

Issuance will "not completely disappear, but will adjust to its seasonal norm from the record-breaking pace of the past several months," said Barclays' Mikhail Foux.

October's "price path has created wider spreads but also brought higher yields that are now in the range where a broader audience may begin to take notice," said NewSquare Capital Senior Fixed Income Portfolio Manager Kim Olsan, noting higher taxable equivalent yields for different tenors of the yield curve.

Municipals largely stayed in their own lane Wednesday, digesting the large slate of new issues as supply dwindles heading into election week, with Bond Buyer 30-day visible supply falling to $5.56 billion.

California sold tax-exempt and taxable GOs, the University of Miami priced a refunding deal while the Harris County-Houston Sports Authority came with a refunding and tender offer.

The key question for municipal market investors is less about who wins the races for the White House and Congress and more about by how much.

While the asset class is still in the red for October, it has pared back earlier losses. The Bloomberg Municipal Index is at negative 1.42% in October and positive 0.84% year to date.

The correction to the municipal market has improved muni to UST ratios while uncertainty hangs over ahead of the election. J.P. Morgan's Peter DeGroot said the firm expects the end of next week "will mark the end of the difficult technical period in 2024 and believe that net supply in November will lead to better valuations broadly in the municipal market."

While fundamentals remain strong — with credit upgrades outpacing downgrades by 3.5 times so far in 2024 — technical factors have been "less supportive," Principal Asset Management strategists said in a report.

"The identity of the marginal buyer may be shifting, and with that the market's valuation of structure and liquidity," said Matt Fabian, a partner at Municipal Market Analytics.

Demand for munis remains "insatiable," said Daryl Clements, a municipal portfolio manager at AllianceBernstein.

"Buyer interest comes as forward supply is projected around $20 billion (the high water mark over the last year) while offsetting calls and maturities sit about $2 billion lower, creating a net supply surplus," said Kim Olsan, a senior fixed income portfolio manager at NewSquare Capital.

The muni market enters the last quarter of 2024 in "excellent shape," said GW&K Investment Management partners John Fox, Brian Moreland, Kara South and Martin Tourigny.

Supply ramps up this week to an estimated $13.361 billion, with several billion-dollar pricings on tap.

Municipal triple-A yield curves played catch up to USTs Friday to close out a week of more mixed economic data that has economists constantly reevaluating their Federal Reserve policy expectations with little consensus.

Municipal bond insurers wrapped $28.921 billion in the first three quarters 2024, a 26.8% increase from the $22.814 billion insured in the first three quarters of 2023, according to LSEG data.

Analysts remain divided about what the stronger-than-expected consumer price index will mean for Federal Reserve policymakers since the Fed appears to be concentrating on the labor market.

Data from the Municipal Securities Rulemaking Board indicates that trade volume may stay high after a consistent third quarter.

With munis establishing "directional footing" in the fourth quarter of this year, the technical backdrop is still the market driver for 2024, said Jeff Lipton, a research analyst and market strategist.