Muni Investors Look to Pounce on Market Weakness in September

The municipal-bond market is expected to be pressured in September by an onslaught of new sales, widening the window for investors to buy cheaper bonds.

An already banner year of state- and local-government bond issuance is expected to continue over the next two months as governments tap the market ahead of potential volatility caused by the US presidential election in November. Plus, the money flowing back to investors from coupon and redemption payments — known as reinvestment demand — which has supported the market this summer, will drop. 

That dynamic creates a supply-demand mismatch that generally pressures prices. Over the past decade, September has been the worst month on average for the muni market, with a loss of 0.9%, according to data compiled by Bloomberg. 

“It’s going to be important that demand remains positive and perhaps even picks up in order to absorb this pickup in net positive supply that we’re going to see,” said Sean Carney, BlackRock Inc.’s chief investment officer of municipal bond funds and head of municipal strategy. 

Governments that have already set up bond sales next month include a $1.7 billion transaction from Washington, DC, and $878 million for the Texas Transportation Commission. The school district serving Los Angeles is also considering a $1.1 billion sale expected to price around Sept. 25. Municipal borrowers have already sold $325 billion of long-term debt so far this year, a 38% increase from 2023’s volume, according to data compiled by Bloomberg. 

“Most institutional and sophisticated investors are well aware that issuance will dry up around election time and would want to put investible cash to work when the calendar is heavy,” said Wells Fargo & Co. municipal strategist Vikram Rai in a research report. “If they have investible cash to put to work, they will use this as a buying opportunity.”

To gin up demand, underwriters have been dangling bargains in front of investors. And amid the surge in supply, muni bonds have been cheapening relative to Treasuries in recent weeks. Paul Malloy, head of municipals at the Vanguard Group Inc., said he’s looking to “keep deploying cash heavily” into the muni market.

“Yields are still attractive, valuations are still cheap and credit quality is still high,” he said.

The Federal Reserve is widely expected to cut interest rates next month for the first time since it began its hiking cycle in 2022. That action may spur some investors to get out of cash-like products and move money into bonds. Investors added $1 billion to the municipal-bond funds during the week ended Wednesday, according to LSEG Lipper Global Fund Flows data.

Wesly Pate, senior portfolio manager at Income Research Management, said he is welcoming cheaper valuations in the muni market. 

A key indicator of relative value, known as the muni-Treasury ratio, measures tax-exempt local government bond yields as a percentage of comparable Treasury securities. For 10-year debt, that threshold is hovering around 70%, higher than the 12-month average, meaning munis look comparatively cheaper.

“We’re finally coming into a market where there’s both supply and there’s not necessarily this amazing technical to support it,” Pate said in an interview. “The market’s probably found a really attractive equilibrium.”

With assistance from Shruti Date Singh.

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