Year to date demand for municipal bonds has vastly outpaced available supply. Net supply is negative $15 billion thus far in 2014. In addition, there is usually a seasonal uptick in redemptions (bond maturities) from June to August, and this year is expected to be one of the heaviest in recent history. There are signs the supply/demand imbalance may be changing course. Fund inflows have trended down recently, averaging about $200 million per week in June, down from the $700 million per week average from the prior month. If this trend holds and supply stays constant, the strong rally in municipals may be nearing an end and opportunities (in the form of higher yields) may arise in the second half of the year. On the supply side, municipal market new issuance totaled $8.5 billion last week, the third busiest week this year. Citigroup estimates that new issuance levels will remain elevated throughout the second half of the year, with approximately $165 billion coming to market between now and year end. The current imbalance has suppressed spreads and absolute yields on municipal bonds, and benchmark muni yields fell as much as nine basis points week over week. The spread compression is most dramatic for specialty states such as Oregon and California, where high state income taxes make tax-exempt bonds very attractive to investors. We are optimistic that the steady supply and falling demand will create reinvestment opportunities for our clients in the second half of the year.