As lawmakers tighten their belts, muni issuance is shrinking. For an investment, subject to the laws of supply and demand, that can mean only one thing: The muni bond market is getting stronger.
Following through on last fall’s election promises to rein in spending, state and local governments are borrowing less. Last month, muni issuance was down 46% compared with May 2010. In fact, municipal borrowing is at its slowest pace in at least eight years, with no meaningful change in sight, according to Bloomberg.
Muni market rallies
The market has noticed. Bond prices have rallied, pushing the yields on 30-year munis to their lowest levels since last November, and analysts expect demand to outstrip supply for the foreseeable future.
The strength in all fixed-income markets comes on the heels of weak U.S. jobs data and a slowdown in manufacturing. The yield on the 10-year Treasury note has dipped below 3% for the first time in almost six months.
In addition to stronger prices, muni bond holders were heartened by the latest tax-collection data. According to Bloomberg, first-quarter tax revenue collected by states increased more than 9% compared with last year. It was the fifth straight quarter of growth.
Last year’s weakness
The turnaround further underscores the key reason why the market softened last year: A profusion of issuance before the Build America Bonds (BABs) program was set to expire. Additionally, other technical market factors came into play, including retail liquidations of muni bond funds (“Muni Market Heal Thyself“). In fact, municipal bond prices have always been heavily influenced by supply and demand considerations (“BABs Bolster Muni Bonds“).
What we are witnessing today, is merely a repudiation of hysterics and a logical response to market forces.