After a tentative start, municipal bonds emerged from July in positive territory for yet another month. Leading the way were lower-rated credits and those with maturities of 12 years and longer, as investors continue to gravitate toward strategies that have “worked” for them year-to-date (YTD ). Directionally, munis continue to take cues from U.S. Treasury rates, but we are seeing dispersion based on credit conditions, which is creating winners and losers. For example, those states struggling with pension reform (e.g., Illinois, Pennsylvania and New Jersey) recently experienced ratings pressure, while states replenishing rainy-day funds (e.g., California) enjoyed greater demand and improved borrowing costs.
The technical backdrop remained favorable in that supply once again underwhelmed investor demand. July issuance was $26 billion—down 6% vs. the 5-year average, 12% vs. the 10-year average and 16% vs. last year. A 25% drop-off from the prior month was meaningful, as it exceeded the typical June-to-July decline of 16%. Meanwhile, demand remained consistently positive, aside from one well telegraphed outflow that we would attribute to Puerto Rico-related concerns. Inflows of $1.9 billion in July brought the 2014 total to $12.4 billion.