July proved that income pays, as the municipal market notched its 13th consecutive month of positive performance thanks to income generation offsetting price losses and boosting total return. The broad financial markets breathed a post-Brexit sigh of relief in July, with equities and other risk assets benefiting and higher-quality assets lagging as investors assumed a “risk-on” stance. Shifting expectations around the course of Federal Reserve rate normalization created uncertainty. Nevertheless, performance in the muni market highlighted the premium being paid for income-producing assets.
A favorable supply/demand dynamic should help drive munis through the remainder of the summer.
New supply of $26 billion was down 26% from 2015 and 12% below both the five- and 10-year averages, making it the lowest July issuance since 2011. Demand, as measured by fund flows, remained strong with $5.9 billion entering municipal bond funds. The market has now seen 43 straight weeks of inflows totaling $51 billion. In a world marked by low (or, in many places, negative) interest rates, it appears a broad range of investors increasingly value the quality, income and yield characteristics of the tax-exempt asset class. Munis’ modest underperformance of Treasuries in July only adjusted ratios to more attractive levels.
Insights and Resources