Municipal bonds fought off early pressure to eke out a ninth positive month in September. The early-month weakness came as supply increased and demand subsided, but was offset as geopolitical concerns fueled a flight to quality that sent investors to the traditional safe-haven assets. With another month of gains, munis are now exhibiting their fourth-strongest price performance in more than two decades.
From a fundamental standpoint, pensions continue to be front and center. States addressing the issue are experiencing easier budget negotiations and smaller gaps, while those failing to enact reform are facing ratings pressure and generally higher borrowing costs. Overall, the asset class continues to benefit from favorable supply/demand, a slow economic recovery and its defensive structure in a low-rate, higher-tax environment. Issuance for September, at $22 billion, was down 17% from the five-year average and 20% from the 10-year average. Year-to-date (YTD) supply of $225 billion is 11% lower than last year. The relatively muted supply was met with demand of $2.8 billion for the month (representing $18.2 billion in inflows YTD).