More municipal bonds are pouring into the market amid robust demand by investors.
As of June, issuance stood at $241.5 billion, a 31.9% increase over last year, according to SIFMA. Total outstanding bonds reached $4.1 trillion.
Within the next few weeks, state and local governments are expected to sell $16.1 billion of munis, though the total is likely to be higher as deals are normally announced less than a month in advance, according to Bloomberg.
The jump in bond sales, analysts said, has been spurred by financing for new infrastructure and higher construction costs.
The market has been able to absorb the increase in supply, Bloomberg reported, noting that returns on municipal bonds this year are about the same as Treasuries.
Appetite for more bonds
Indeed, investors have a lot to cheer about (“Munis Upgraded, Rated Issuers Rise”).
As one analyst commented, “credit quality remains stout.” Upgrades of municipal issuers outpaced downgrades so far this year, while the number of rated issuers reached a five-year high.
Also appealing to investors is the muni-to-Treasury ratio, a common gauge of the attractiveness of highly rated municipal bonds. It’s currently near its 20-year low, which means the after-tax yields on Treasuries would need to surge to make U.S. government debt more lucrative than municipal bonds.
Further, the Federal Reserve Board said it expects to ease short-term interest rates this year. While trying to predict when and by how much rates might decline is a fool’s errand, we’re confident that when it does happen, long-term rates – the focus of municipal bond investors – will drop as well.
With tax-free bond yields scraping years-long highs, investors who parked their cash will regret they did.
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“Buyers are looking for reason and opportunity to seek additional yield when they’re purchasing paper right now,” another analyst told Bloomberg, citing recent deals.
Redemptions and reinvestments
Remember the flood of cash from redemptions and reinvestments we discussed earlier (“Replenishing After Muni Redemptions”)?
It’s now upon us.
“While supply has been outsized over the last several weeks,” Nuveen’s chief investment officer told The Bond Buyer, “the market has also seen outsized reinvestment demand over the last several months.”
In other words, we’re in a particularly advantageous time for investors to find the tax-free bonds that suit their objectives.