Munis (and investors) carried on in June, defying the long-running seasonal trend to notch the best June return in more than 15 years. Typically one of the weakest months, this June delivered the best return of the year, even while producing the highest June supply in eight years. Uncertainty around the economic recovery, the Fed’s path toward interest rate normalization and the UK vote to leave the European Union (EU) spurred a “risk-off” sentiment that benefited quality assets. As such, demand for munis was strong enough to readily absorb the elevated supply.
June offered a testament to munis’ defensive nature and value as a portfolio diversifier.
New issuance of $44 billion was above both the five- and 10-year averages. The increase could be attributed partly to advance refunding activity, which saw an uptick as markets pushed back their expectations for Fed rate hikes. Meanwhile, nearly $7 billion entered municipal bond funds in June, bringing the year-to-date total to $34.5 billion. The market has experienced 38 consecutive weeks of inflows, garnering $45 billion in new money. The primary target of those assets: long-duration and high-yield funds. Our approach amid the prevailing uncertainty is to remain invested, with a focus on income in a world where yields and return expectations have been adjusted lower.
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