The municipal market notched another positive month, benefiting from a continued imbalance in supply and demand as well as ongoing geopolitical conflicts that have served to maintain a flight-to-safety bid in fixed income securities. Investor appetite for the asset class, particularly during times of uncertainty, has been robust and issuance has been unable to satisfy the demand.
Specifically, new issuance came in at $24.6 billion for the month, bringing year-to-date (YTD) supply to $203.4 billion (down 12% vs. last year and 9% vs. the five-year average). Demand, as measured by fund flows, was $2.9 billion for August and $15.3 billion YTD. All told, the net-negative supply pattern is growing ever larger, highlighting the market’s strong technicals. In addition, muni creditworthiness remains on solid footing.
Notably, the market has never started a year with eight consecutive months of positive performance, a run we attribute to falling rates on the back of uneven U.S. economic data and geopolitical tensions that are driving fixed income assets, particularly munis, higher. The trend lower in rates has left fixed income markets far from cheap. However, municipals continue to be sought after for their defensive structure, tax-exempt income and overall stability in today’s low-rate environment.