MuniLand: The Streak Continues, Now at 47 Weeks

The municipal market continues its streak of 47 weeks of positive fund inflows. The positive fund flows have so far exceeded net issuance, which is part of the reason for positive total and excess returns in the sector. Year-to-date, the municipal market has grown by about $68 billon, a reversal from the prior two years wherein the total market had contracted from about $3.7 trillion to about $3.5 trillion. Looking into September, Bloomberg News reports visible supply continuing to exceed maturing bonds and announced calls by about $2.0 billion, which can be easily absorbed by the current rate of inflows. Also according to Bloomberg, the four-week moving average for inflow is about $878 million. If the current trend continues, the muni market will have about $1.5 billion more demand than supply. This would signal that the muni market will continue to be well bid, which will keep spreads tight and possibly tighten them further. Looking past September into November’s ballot initiative and presidential election season, we see potentially significant spending authorization for infrastructure. For example, Detroit is requesting $4.6 billion over 20 years for a regional transit authority, Seattle is asking for $54 billion over 25 years for light rail, Los Angeles is looking to make permanent a sale tax increase for highway improvements, and Atlanta is seeking $2.4 billion for better bus service and expanded rail routes. Also, both presidential campaigns are delivering stump speeches in favor of infrastructure spending as a way of boosting the U.S. economy. Additional supply would be welcome in a market where valuations are looking stretched. However, we do not anticipate an immediate increase in supply since ballot initiatives and subsequent debt issuance are spread out over long periods of time. So far, details on proposed infrastructure spending from the presidential campaigns are still forthcoming, and it is possible that debt could be issued in the taxable markets. Supply and demand outlooks are a key component of our municipal sub-sector monthly analysis and an important component of our expected return outlook. If the current trends in the municipal market continue, we may see continued outperformance from the sector.