Volatility returned to more normal levels in October as the market refocused on the data and rate hike expectations settled on December or early 2016. Munis outperformed U.S. Treasuries, aided by continued inflows and below-average bond issuance. New supply of $32 billion was 11% lower than last October and 10% below the 10-year average. Demand picked up, evidenced by a significant $2.8 billion in inflows after five consecutive months of outflows.
We would not be surprised to see an increase in issuance toward year-end, as the Treasury recently reopened the SLGS (state and local government series securities) window after sales of the securities had been suspended in March to manage the national debt limit. SLGS are often used by state and local governments for their advance refunding escrows. That said, we see the supply uptick as short-lived and believe the attractive relative income and high-quality nature of the tax-exempt asset class should continue to guide sentiment.