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MARKETS
11 June 2024

Weekly Municipal Monitor—Supply Surge

By Sam Weitzman
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Munis Rallied Last Week

Investment-grade munis posted strong returns last week as municipal yields moved lower across the curve. After moving lower with Treasuries early in the week, high-grade municipals outperformed the rate selloff on Friday following stronger-than-anticipated payrolls data. Meanwhile, muni supply hit its highest level since 2017 as flows turned positive. The Bloomberg Municipal Index returned 1.07% during the week, the High Yield Muni Index returned 1.29% and the Taxable Muni Index returned 0.65%. This week we highlight the robust municipal issuance observed this year.

Weaker Technicals Were Driven by an Elevated New-Issue Calendar

Fund Flows: During the week ending June 5, weekly reporting municipal mutual funds recorded $549 million of net inflows, according to Lipper. Long-term funds recorded $561 million of inflows, intermediate funds recorded $35 million of inflows and high-yield funds recorded $154 million of inflows. Short-term funds recorded $26 million of outflows. This week’s inflows led estimated year-to-date (YTD) net inflows higher to $11.5 billion.

Supply: The muni market recorded $16 billion of new-issue volume last week, up nearly three times from the prior week. YTD issuance of $207 billion is 43% higher than last year’s level, with tax-exempt issuance 51% higher and taxable issuance 3% lower year-over-year (YoY). This week’s calendar is expected to decline to $8 billion. Largest deals include $700 million Los Angeles County and $437 million Oklahoma Industries Authority transactions.

This Week in Munis: Supply Surge

Last week’s $16 billion of muni supply marked the highest weekly level of issuance since 2017 and continued a trend of elevated issuance observed this year. Through May 31, 2024, YTD municipal issuance of $193 billion marked the highest level of issuance for the first five months of a year in over a decade. Municipal supply is now on pace to exceed $460 billion for the 2024 calendar year, which would represent a 26% increase from 2023 levels.

Exhibit 1: YTD Municipal Issuance Through May 31, 2024
YTD Municipal Issuance Through May 31, 2024
Source: Bond Buyer. As of 07 Jun 24. Select the image to expand the view.

This year’s elevated supply has been largely driven by tax-exempt refunding issuance, as refunding-related issuance is on track to increase 72% YoY. The higher refunding activity is attributable to issuers refinancing taxable municipal debt that was issued in recent years, taking advantage of the better relative value offered by the tax-exempt market in the higher rate environment. In addition to taxable refunding, because the tax-exempt advanced refunding provision was outlawed in 2017, a greater level of tax-exempt debt is reaching current call dates, contributing to additional current refunding volume.

Exhibit 2: New Money vs. Refunding Supply
New Money vs. Refunding Supply
Source: Bond Buyer. As of 31 May 24. Select the image to expand the view.

Following years of negative tax-exempt net issuance trends that have limited growth and supported a strong technical backdrop for the municipal asset class, 2024 net new tax-exempt issuance has been positive and totaled $58 billion. The higher supply levels observed have contributed to weaker market technicals and underperformance versus high-grade taxable fixed-income. As a result, nominal municipal yields and after-tax relative valuations versus Treasuries and corporate fixed-income are more compelling than at the start of the year, contributing to an attractive value proposition for investors subject to tax rates.

Exhibit 3: Monthly Net Muni Issuance
Monthly Net Muni Issuance
Source: Bloomberg, Western Asset. As of 31 May 24. Select the image to expand the view.

Municipal Credit Curves and Relative Value

Exhibit 4: Muni Credit Curves
Muni Credit Curves
Source: Bloomberg, Western Asset. As of 07 Jun 24. Bloomberg BVAL Municipal Credit Indices (AAA, AA, A, BBB, respectively) and US Sovereign Curves. Taxable-Equivalent Muni Credit Curves consider the top marginal effective tax rate of 40.8%. Select the image to expand the view.
Exhibit 5: Taxable-Equivalent Muni Credit Curves
Taxable-Equivalent Muni Credit Curves
Source: Bloomberg, Western Asset. As of 07 Jun 24. Bloomberg BVAL Municipal Credit Indices (AAA, AA, A, BBB, respectively) and US Sovereign Curves. Taxable-Equivalent Muni Credit Curves consider the top marginal effective tax rate of 40.8%. Select the image to expand the view.
Exhibit 6: AAA Munis vs. Treasuries
AAA Munis vs. Treasuries
Source: Muni Yields: Thomson Reuters MMD, Treasury Yields: Bloomberg. As of 07 Jun 24. Past performance is not a guarantee of future results. It is not possible to invest directly in an Index. Select the image to expand the view.
Exhibit 7: Tax-Exempt and Taxable Muni Valuations
Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg. Yield-to-worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. As of 07 Jun 24. Select the image to expand the view.

Western Asset Key Themes for Muni Investors

Theme #1: Municipal taxable-equivalent yields are above decade averages.

Exhibit 8: Muni and Taxable-Equivalent Muni Yield-to-Worst
Muni and Taxable-Equivalent Muni Yield-to-Worst
Source: Bloomberg, Western Asset. As of 07 Jun 24. Bloomberg Municipal Bond Index Yield Considering Highest Marginal Tax Rate of 40.8%. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.

Theme #2: The muni yield curve remained inverted, leading to potential value in bar-belled structure.

Exhibit 9: AAA Municipal vs. Treasury Yield Curves
AAA Municipal vs. Treasury Yield Curves
Source: Bloomberg, Western Asset. As of 07 Jun 24. Bloomberg Valuation Service (BVAL) AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.

Theme #3: Munis offer attractive after-tax yield pickup versus long Treasuries and corporate credit.

Exhibit 10: Municipal vs. Taxable Fixed-Income Yields by Quality
Municipal vs. Taxable Fixed-Income Yields by Quality
Source: Western Asset, Bloomberg. As 07 Jun 24. 10- and 30-Year comparison reflects Bloomberg Valuation Service (BVAL) AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. AA Muni reflects the Bloomberg AA Muni Bond Index. A Muni reflects the Bloomberg A Muni Bond Index. BBB Muni reflects the Bloomberg BBB Muni Bond Index. HY Muni reflects the Bloomberg High Yield Muni Bond Index. AA Corp reflects the Bloomberg AA Corporate Bond Index. A Corp reflects the Bloomberg A Corporate Bond Index. BBB Corp reflects the Bloomberg BBB Corporate Bond Index. After-tax yield considers top marginal tax rate of 40.8%. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.

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