While speculation swirls around the upcoming election and fallout from the Fed’s recent rate cut, analysts seem consistently bullish on one issue: Value in the municipal bond market.

In the next several weeks, up until the election, about $6 billion in reinvestment capital will be deployed in the market. At the same time, issuance is expected to reach $11 billion to $13 billion, a J.P. Morgan municipal strategist told The Bond Buyer.

This combination of a supply and demand imbalance, as well as shifting interest rates, “may offer the best buying opportunity for bonds this year,” according to the article.

Muni yields attractive now

Last week, the Federal Reserve Board lowered its benchmark interest rate a half percentage point, the first cut since March 2020.

The Fed’s purview is the shortest of interest rates – the rate banks charge each other to lend overnight – while municipal bond investors focus on long-term rates, which are determined primarily by the market, buyers and sellers. The rates don’t move in lockstep.

As the economy slows, muni yields will eventually ease, but highly attractive yields are available right now.

‘It’s a new era for bonds’

“It’s a new era for bonds, and not just because of expected moves by the Federal Reserve,” a Vanguard manager wrote in Barron’s just a day before the Fed’s half-point cut. “All-in yields are attractive across fixed income sectors and real interest rates, the expected return from yields after expected inflation is subtracted, are near historical highs. This return to sound money, where positive real interest rates persist, is reflective of a structural shift that can provide a solid foundation for long-term risk-adjusted returns.”

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The increase in issuance, according to the Vanguard manager, is fueled by capital projects that need funding as Covid-era stimulus funds have been spent, an advantageous time for muni investors.

“These conditions point to one of the best entry points in years.”

Imbalance unlikely to last

As we recently discussed (“Election Fallout and Muni Bonds”), there may be drama in the elections, but elections usually don’t cause drama in the municipal bond market.

The demand-supply imbalance, while favorable now, isn’t expected to last. Issuance should ease as the year ends.

“At that point, demand could outstrip supply and push up prices, particularly if investors turn more attention toward long-term bonds,” the manager wrote.

Recently, though, we’ve been seeing the taxable-equivalent yield on 30-year, A-rated bonds at an alluring 6.62% for taxpayers paying a 40.8% tax rate.

Meantime, there’s about $6.4 trillion parked in money-market funds, whose yields are falling. It doesn’t take a soothsayer to know that cash won’t be idling for long.