Muni Bonds Find Their Footing as Supply Moderates

We have previously noted the recent surge in supply being floated in the municipal market [Muni Bond Issuance Spikes in Q3 – published 10/11] and the effect that was having on performance. That trend in issuance continued into the 4th quarter as October hit a 30-year high of $53 billion for the month. Meanwhile, demand as measured by flows into municipal bond mutual funds had slowed into the end of the 3rd quarter, and has actually printed a net outflow in 2 of the last 3 weeks (after 54 weeks of inflows). These dynamics, coupled with rising treasury rates, led to negative performance for the sector during the past month, -0.94% as measured by the BAML Muni Master Index.

The increase in supply has also driven much higher trading volumes, as investors make room in portfolios for new issues and reposition themselves due to increasing volatility and redemption demands. According to the MSRB, total par traded in the 3rd quarter this year was $837.9 billion, accounting for a 52.1% increase over the same quarter last year, and constituted the largest amount since the second quarter of 2013 when total volume reached $838.3 billion. Many will recall that the second quarter of 2013 was the beginning of the so-called Taper Tantrum, as markets reacted to then Fed Chairman Bernanke’s projection for a wind down of QE. Periods of volatility and weaker performance generally bring opportunities for those prepared to take advantage of them, and for SNW this time was no different. We took several opportunities over the past few weeks to capitalize on cheap new issues and secondary offers. Though brief, the recent volatility and relative underperformance now seem primed to reverse as supply has dropped off materially and is expected to remain low through the end of the year. The Bond Buyer 30 Day Visible Supply Index has dropped well below the YTD average and is at its lowest level since early August, while at the same time muni bonds posted positive performance for the week and the lower new issue volume was very well received. 

Source: Barclays, Bloomberg, Sumridge, Bond Buyer and MSRB