June typically is not a friendly month for the tax-exempt asset class, but 2014 has not been a typical year. While it was an active month overall, municipals essentially ended it flat, but hit the mid-year point emphatically in the black with a year-to-date (YTD) return above 6%. Performance was again supported by weak U.S. economic data, as first quarter gross domestic product growth was revised downward to -2.9%. A still-accommodative Fed also gave the market comfort.
While new issuance was stronger than in prior months, the favorable supply/demand dynamic that has driven performance YTD remained a tailwind in June. Issuance for the month was $34 billion, consistent with the five-year average for June. More notably, however, this was up 32% from last month. Issuance is now down only 16% compared to last year, and munis remain on pace for $300 billion in total issuance for 2014 (still an estimated net-negative supply of $40 billion). Demand, meanwhile, came in at roughly $2.2 billion for the month, bringing the YTD figure to $10.6 billion. Flows continue to be concentrated in high yield, intermediate and flexible strategies.
The strong technical picture is accompanied by improving fundamentals across municipal issuers. That said, the market did see an interesting mix of stories in June, as good news in California was offset by less favorable events in New Jersey and Puerto Rico (more on these below). Overall, the market took the developments in stride.