In the municipal bond market, stability has been the name of the game leading up to the Federal Open Market Committee meeting and the release of the Consumer Price Index report. With U.S. Treasury yields on the decline and equities exhibiting mixed performance, market players are eagerly awaiting key economic indicators for guidance. Vikram Rai, head of municipal markets strategy at Wells Fargo, highlighted the significant shift in market sentiment since the beginning of the year. There are now increased expectations surrounding economic activity, job growth, and inflation. Despite higher rates seen across the curve in 2024, investors are acknowledging the potential hurdles for significant rate increases. This cautious stance is further reinforced by the realization that the Fed may be less inclined to cut rates, with only one cut priced in for the year.
While muni-UST ratios have dipped slightly following a recent selloff, Rai maintains that valuations remain attractive. As of the latest data, the two-year muni-to-Treasury ratio stands at 65%, signaling relative value in the municipal bond space. This sentiment is echoed by ICE Data Services, which reported similar ratios across different maturities. With upcoming events such as the FOMC meeting and CPI report, the potential for yield movements remains high. Should inflation numbers come in below expectations or the Fed adopt a more dovish tone, we could witness a sharp drop in yields.
Tuesday saw robust activity in the primary market, with notable issuances from various entities. Morgan Stanley took the lead by pricing a $700 million tax and revenue anticipation note offering for Los Angeles County, showcasing the ongoing demand for municipal securities. Barclays also made waves by pricing green general revenue bonds for the Massachusetts Water Resources Authority. The day’s issuance spree included deals from the New York City Housing Development Corp., Mobile County Industrial Development Authority, and several other prominent issuers.
Looking ahead, analysts are keeping a close eye on the municipal bond market’s supply dynamics. Despite a recent drop in issuance volume, there are concerns about an elevated forward supply calendar compared to historical averages. Matt Fabian of Municipal Market Analytics pointed out that price resilience in the market has been supported by favorable yields and relative value. A substantial reinvestment cycle is underway, with a significant amount of tax-exempt principal maturing in the coming months. This influx of reinvestment capital, coupled with strong customer buying activity, has kept the market buoyant.
Various sources provide insights into the municipal bond yield curve, with slight variations in yield levels. Refinitiv MMD, ICE AAA, S&P Global Market Intelligence, and Bloomberg BVAL offer slightly different perspectives on yield movements. While AAA scales have remained relatively stable, there are minor fluctuations in yield levels at different points on the curve. Treasuries, on the other hand, have exhibited firmness with a downward trend in yields across various maturities.
The municipal bond market continues to attract investor interest despite macroeconomic uncertainties. With key events on the horizon and a robust pipeline of issuances, market participants are poised for potential opportunities in the weeks ahead. While challenges remain in the form of supply pressures and yield fluctuations, the overall sentiment remains cautiously optimistic.