Securitization

As investors contemplate rate policy for the remainder of 2024, "there have been a few strategies from which to choose to boost yield — short positioning, curve extension and credit quality," noted Kim Olsan, senior fixed-income portfolio manager at NewSquare Capital.

Barclays rate strategists believe the 10-year part of the Treasury curve has room to cheapen. "In that case, tax-exempts will likely not only follow, but underperform."

Municipal bond mutual funds saw inflows as investors added $528.7 million to funds after $674.1 million of inflows the week prior, according to LSEG Lipper. This marks seven straight weeks of inflows.

"There's an important 'date certain' the market may overreact to, but by and large, [this] week is looking positive given a lighter new- issue calendar," said AllianceBernstein strategists.

"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.

Recent events have been a "roundtrip" for rates, starting with the sentiment shifting from slowing inflation to a softening labor market, said James Pruskowski, chief investment officer at 16Rock Asset Management.

This week's new-issue calendar will be "outsized," said Anders S. Persson, Nuveen's chief investment officer for global fixed-income, and Daniel J. Close, Nuveen's head of municipals.

All eyes now turn to the September Federal Open Market Committee meeting where the Fed is expected to cut rates, but market participants are mixed on whether it will be a 25- or 50-basis-point cut.

Municipal bond mutual funds saw inflows as investors added $1.112 billion to funds after $892.2 million of inflows the week prior, according to LSEG Lipper.

"The Fed remains data dependent as always, but it now appears that the 'more good data' bar is not as high as it was before, particularly with labor market developments becoming more important," said Michael Gregory, deputy chief economist at BMO Economics.

Yields may move lower after the Federal Reserve "communicates its goals to ease policy in coming meetings," said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

Concerns have been raised about audits related to nearly $2.9 billion of ratepayer-backed bonds sold for Oklahoma utilities in 2022.

"The overall muni market appears to be in a good balance despite the hefty slate of primary issuance that has occurred over the past few months," Birch Creek Capital strategists said.

The muni market tends to have "remarkable patience" in relation to USTs, said BofA strategists.

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.

This week again sees elevated supply, as issuance sits at $9.673 billion, with Tuesday being a very busy day.

The initial reaction was a little bit a flight-to-quality trade in rates, which is supportive of USTs and munis as safe-haven assets do well during times of uncertainty, said Chris Brigati, senior vice president and director of strategic planning and fixed income research at SWBC.