Munis face $10.6B supply, more geopolitical uncertainty

The muni market faces a week of average supply as flows into muni mutual funds remain strong and geopolitics continue to be the wildcard.

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The muni market got off to a slow start Monday as market participants are “feeling out” the asset class at the start of the week, trying to figure out where the deals are going to come, said Peter Delahunt, managing director and head of the municipal bond department at StoneX.

The rest of the week may also be quiet due to a lack of financial news, said Chris Brigati, managing director and CIO at SWBC.

Last week was also quiet. “Even though we had a lot of inflows into funds and ETFs, and there’s a lot of SMA money looking to be put to work, it was oddly quiet for the secondary market, so I expect that to pick up a little bit this week. As long as there’s no market shocks, people start dribbling some of that cash into the market,” he said.

Recent weakness has led to a buying opportunity, given the attractive levels, Brigati said.

Issuance is an estimated $10.567 billion this week, with $8.948 billion of negotiated deals on tap and $1.62 billion of competitives, according to LSEG.

The New York City Transitional Finance Authority leads the negotiated calendar with $1.5 billion of future tax-secured subordinated bonds, followed by the District of Columbia with $1.171 billion of income tax secured revenue bonds.

The competitive calendar is led by Denton, Texas, with $281.26 million of certificates of obligation.

Geopolitics continues to be the wildcard, as the U.S. and Iran play a “ping pong game,” Delahunt said.

“We want to pause. We’re not going to pause. We’re going to pause. We’re back to attacking,” he said.

The two countries continue to trade attacks Monday amid a proposal for a 10-day ceasefire as a way to de-escalate tensions in the Middle East, said Tim Iltz, fixed income credit and market analyst at HJ Sims.

“With shipping traffic through the Strait of Hormuz reportedly at a virtual standstill, we are seeing some relief in oil prices this morning as optimism lifts for a potential peace deal,” he said.

Some volatility in the market due to geopolitical events, along with other factors, will likely raise rates overall, which could be a good thing for investors, said Tim McGregor, managing partner at Riverbend Capital Advisors.

While still constructive on munis, things may become more challenging, “as valuations have grown increasingly stretched, attractive opportunities have become scarcer, Treasury yields are expected to continue drifting higher, and heavy issuance continues unabated,” Barclays strategists said.

If July is any indication, the environment for the asset class may be more difficult, they said.

Despite last week’s “positive market reaction to softer inflation data and more dovish comments from the Fed chair, tax-exempt bonds have come under modest pressure, with 5-year and 10-year MMD-Treasury ratios rising 1-2pp, while long-dated ratios have remained little changed,” Barclays strategists said.

Meanwhile, both investment-grade and high-yield muni indices have given back roughly 0.5% this month, they said.

“Credit spreads within the lower-rated investment-grade segment have continued to tighten, with single-A-rated bonds underperforming the least,” according to Barclays strategists.