True to form, June exhibited elevated volatility, higher interest rates and negative municipal performance led by securities with longer duration and lower credit quality. But this June was unusual in that the narrative (and, more specifically, the rate trajectory) changed in the closing days.
For the most part, U.S. economic data showed signs of strength throughout the month, sending rates higher (and prices lower). However, worry of a potential Greek default late in the month spurred an investor flight to quality that caused rates to reverse. Municipals were able to outperform more volatile Treasuries across the curve, but were not without their own issues as Puerto Rico’s governor announced the island’s $72 billion in debt was "not payable." Puerto Rico bonds initially sold off, but the revelation ultimately had little to no effect on the broader tax-exempt market.
Municipal bond issuance for the month was a seasonally correct $34.4 billion, down 4% year over year. Demand for the asset class remains tepid. Roughly $1 billion exited muni funds in June, but year-to-date flows are a positive $8.5 billion. Looking ahead, we expect the supply/ demand backdrop to improve as issuance wanes and retailled demand picks up during what are typically heavy reinvestment months.