A surge of municipal bonds is hitting the market this year, feeding a demand that continues strong.

In the first 10 months of 2024, state and municipal governments and agencies issued $447 billion of debt, a whopping 39% increase from a year earlier, according to a report in The Wall Street Journal.

The $447 billion in new issues was about $105 billion more than the total of bonds retired or refunded, according to the report.

Remarkably, the sharp rise in issuance comes as borrowing costs have been the highest in years.

Analysts say need is driving the swell, as pandemic-era federal aid is winding down and costs for labor, materials and services is rising.

Cash equivalents losing their luster

Meantime, investors are plowing cash into the market. Through August of this year, municipal-bond fund inflows were $26.5 billion, compared with $8 billion from the same period last year.

It makes sense: As the Federal Reserve Board began to ease short-term interest rates (“Rate Cut Shines on Muni Bonds”), investors who have parked their cash in cash-equivalents have seen their yields edge lower and are looking for more attractive alternatives.

Additionally, the prospect of higher taxes, together with the tax-exempt nature of munis, adds to their allure.

And amid the current environment, municipal bond yields are at their highest in years.

Aftermath of Fed rate hikes

Last week, the Fed lowered interest rates for the second consecutive time. History shows the price of municipal bonds usually increases (which means yields move lower) after the Fed has eased rates, suggesting that now is a good time to find elevated yields.

“With municipal yields across all maturities higher than at the start of the year and the (yield) curve continuing to show significant steepness, we believe investors may find this an opportune time to participate in the muni market as we enter the early stages of the Fed cutting cycle,” Lord Abbett said in a report.

Also important to note are credit fundamentals, which remain strong.

“As of the end of the second quarter, state and local tax revenues grew over 7% compared to the previous year; compared to the five-year average, tax receipts were almost 18% higher,” according to Lord Abbett.

So far this year, municipal defaults – which have always been rare – are below historical averages. The investment firm doesn’t see “any significant uptick in indications of credit deterioration, such as dwindling reserves or issuers requesting covenant leniency – factors that historically have hinted at upcoming distress.”

We don’t believe in trying to time the market. In our decades serving generations of tax-free bond investors, we’ve never seen anyone accurately do so for a sustained period of time.

Instead, we help clients consistently find value regardless of market conditions.

In today’s market, investors are in an advantageous position where there’s both abundant supply and attractive yields, making value easy to spot.