(Bloomberg) -- Municipal bonds rallied along with other parts of the global debt market, sending tax-exempt yields diving just as investors braced for a surge in debt sales by US states and cities.
Yields on benchmark state and local-government debt were down as much as 8 basis points Monday, pushing 10-year tax-exempt rates to 2.5%, the lowest since March, according to data compiled by Bloomberg. Those on 30-year securities have dropped to 3.4%, the lowest since January. The muni market was outpacing Treasuries, which initially rallied amid a wave of selling in stocks around the world, and then reversed course after stronger-than-expected US economic data.
Monday’s rally extends a stretch of strong performance for the muni market. It gained 1.03% in the week ended Aug. 2, marking one of its best weeks of 2024, according to the Bloomberg’s muni index.
Demand for munis will face a test in what is expected to be a huge week of sales by local borrowers. More than $16 billion of municipal bonds are expected to price this week in what could be the busiest week of issuance since 2021, data compiled by Bloomberg show. The tally of new issuance is already running 33% above last year’s pace, as governments rush to market ahead of potential volatility around the US election in November.
“We’ve got a huge calendar scheduled this week for munis and issuers will certainly want to take advantage of the lower yields,” said Patrick Luby, municipal strategist at CreditSights Inc. “The question is will investors be confident to step in and buy at adjusted levels.”
Luby said there will likely be “a delicate dance” between Wall Street underwriters who want aggressive pricing, meaning the lowest possible borrowing costs for issuers, and investors looking for higher yields.
August Rally
Munis and other parts of the fixed-income world are rallying as investors seek safety with riskier assets sinking, said Eve Lando, a portfolio manager at Thornburg Investment Management Inc. The S&P 500 Index slumped Monday and a key measure of credit risk rose, stymieing US company bond sales.
Cash flowing back to investors through maturing muni debt and interest payments at the start of August is also bolstering reinvestment demand for the bonds, Lando said.
The largest muni ETF, the iShares National Muni Bond ETF, is coming off its biggest week of inflows since September 2023, according to data compiled by Bloomberg.
--With assistance from Amanda Albright.
©2024 Bloomberg L.P.
