Municipals trailed Treasuries in September and notched their first negative return since June 2015 amid a heavy new-issue calendar and the seasonal transition to net-positive supply. Issuance of $35.7 billion represented the largest September supply on record, and followed record-setting August issuance. September supply was up 51% versus 2015; it was also 35% above the five-year average and 28% higher than the 10-year average.
We remain constructive on the asset class for its ability to provide tax-exempt income, low volatility and diversification.
The recently elevated supply, in our view, is likely due to issuers pulling deals forward to avoid uncertainty around the U.S. presidential election in November and a potential Fed rate hike in December. As a result, November and December issuance may underwhelm. Meanwhile, demand for the asset class remained largely positive, though softer than the robust levels seen throughout most of the year. Nearly $4 billion entered municipal funds in September, making for inflows of more than $51 billion year-to-date (YTD). The somewhat weaker flows in recent weeks are likely attributed to the turn in performance (as muni demand follows performance) and the ultimately unfounded fears of a September rate hike.
Insights and Resources