As we navigate the nuances of the municipal bond market, recent trends showcase a complex interplay between U.S. Treasury yields and municipal offerings. In the latest observations, municipal bond yields have exhibited slight resilience in the face of declining U.S. Treasury (UST) yields. On a day where equity markets wrapped up on a downtrend, munis managed to reclaim some strength. According to notable metrics, municipal yields increased marginally by up to four basis points, while U.S. Treasury yields dipped by five to nine basis points, particularly more pronounced in the shorter tenors.
The current ratio of municipal bonds to U.S. Treasuries illustrates their relative value position: two-year munis at 66%, five-year at 66%, ten-year at 67%, and a striking 82% for thirty-year maturities. These figures, extracted from the Municipal Market Data (MMD) readings and corroborated by ICE Data Services figures, suggest a more beneficial positioning for munis relative to USTs historically. Despite this, it’s essential to note that munis lagged behind UST movements last Monday, even while showing stronger year-to-date performances against taxable bonds.
Reflecting on the entirety of 2024, the figures speak volumes about municipal performance. Year-to-date, municipal bonds have delivered a modest return of +0.73%, in stark contrast to USTs’ +0.23%. However, there are undercurrents of concern as year-end losses generally hover around -1.77% for munis and -1.97% for high-yield alternatives. Barclays strategist Mikhail Foux underscores that the trajectory of interest rates remains crucial as we head into 2024, marking a time when investment-grade indices began the year at overly rich levels without significant buffers against market volatility.
Foux’s analysis suggests that while municipal bonds have shown resilience, the upcoming year could be challenging, particularly due to heightened levels of issuance and a lack of institutional demand. This raises a threshold for testing the market’s capacity to absorb additional supply, especially during periods that may prove tumultuous.
Looking ahead, expectations for next year forecast a formidable issuance landscape between $450 billion and $500 billion, with some market observers speculating higher levels. The driving forces behind this anticipated supply boom are multi-faceted: from demands for infrastructure renewal to the depletion of pandemic relief funds. Furthermore, it becomes critical to observe how the political landscape may affect the municipal market, especially with a new administration on the horizon.
Portfolio manager Jeremy Holtz from Income Research + Management aptly points out that while attractive yields could propel demand, the fundamental challenges remain. The sufficiency of supply could create a bottleneck for purchases, leading to stress points within the market. Holtz emphasizes that a supply-heavy market may strain investor appetite for municipal bonds,