(Bloomberg) — Long-maturity municipal bonds are the cheapest since November relative to Treasuries as investors in the market for US state and local debt confront questions around tax policy and absorb swelling issuance.
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Yields on 30-year, top-rated munis were about 85% of the level of similar-maturity Treasury rates as of Thursday, the highest since right after President Donald Trump’s election victory in November, data compiled by Bloomberg show. A climbing ratio shows munis are underperforming US government debt.
Long-term muni supply is up 27% in February from a year earlier, to about $21 billion, data compiled by Bloomberg show. That’s fed into the weakness, and some investors are starting to see value. State and local securities tend to offer lower yields than Treasuries because of the tax-free interest they pay.
“This is a function of a little more muni supply and a little more volatility in the Treasury market,” said Paul Malloy, head of municipals at the Vanguard Group. “Things are normalizing to what I would call fair value.”
Benchmark 30-year muni yields are down about 9 basis points over the past two days, at 3.93%, while similar-maturity Treasury yields dropped around 15 basis points to roughly 4.7%. The fixed-income market rallied on Friday as a weak retail sales report bolstered bets on Federal Reserve interest-rate cuts.
“There’s a lot of value in the market with yields being this high” on munis, said Bill Delahunty, a portfolio manager at Morgan Stanley Investment Management. “We do see some opportunities.”
Questions around federal tax policy, and what it means for demand for munis, has also been contributing to the weak relative performance. Tax cuts implemented during Trump’s first term are set to expire and the GOP-led Congress is examining ways to extend them.
Munis have been “somewhat hamstrung by continued confusion” over the implications of the potential extension of 2017 tax laws and volatility in rates, said Eric Kazatsky, senior US municipals strategist for Bloomberg Intelligence.
There’s also the potential threat to munis’ tax-free status, if the market is targeted by legislators looking for ways to cut spending.
Next week may bring a better backdrop for state and local debt, with $18 billion of reinvestment capital likely available to absorb $4.3 billion in supply, according to JPMorgan Chase & Co. estimates.