skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

MARKETS
14 December 2021

Weekly Municipal Monitor—Supply in Review

By Sam Weitzman and Dave Fare
Download the Article

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Municipal Yields Were Unchanged During the Week

The US AAA muni yield curve was unchanged during the week. Municipals shrugged off the rate selloff as Municipal/Treasury ratios were grinding tighter. Municipal fund inflows extended their record pace. The Bloomberg Municipal Index returned -0.02%, while the HY Muni Index returned 0.04%. This week, we review municipal supply over the last year, and highlight our 2022 supply expectations.

Municipal Demand Remains Resilient Heading Into Year-End

Fund Flows: During the week ending December 8, municipal mutual funds recorded $804 million of net inflows. Long-term funds recorded $979 million of inflows, high-yield funds recorded $702 million of outflows and intermediate funds recorded $194 million of inflows. Municipal mutual funds have now recorded inflows 81 of the last 82 weeks, extending the record inflow cycle to $160 billion, with year-to-date (YTD) net inflows surpassing a record calendar year pace at $99 billion.

Supply: The muni market recorded $19.5 billion of new-issue volume during the week. This week’s new-issue calendar is expected to decline to approximately $7 billion. The largest deals include $800 million state of Connecticut and $572 million CSCDA Community Improvement Authority transactions.

This Week in Munis—Supply in Review

As we near the end of the year, we take note of 2021 municipal supply trends and look ahead to 2022. Through last week, total municipal issuance YTD of $474 billion has kept pace with last year’s levels, with tax-exempt issuance trending 12% higher year-over-year (YoY) and taxable issuance trending 22% lower YoY. Consistent with our expectation as detailed in one of our blog posts last year, we expect 2021 muni supply to close at or modestly above last year’s levels.

Exhibit 1: Municipal Supply
Municipal Supply
Source: Bloomberg League Tables. As of 10 Dec 21. Select the image to expand the view.

While 2021 absolute levels of supply are in line with last year’s levels, we have observed notable divergence between taxable and tax-exempt markets. Increased rate volatility, combined with the prospects for infrastructure legislation to support future taxable issuance, has contributed to the decline in taxable issuance from last year. Meanwhile, higher tax-exempt issuance was supported by demand for new projects, as The Bond Buyer reported new money issuance reached a decade high, on pace to exceed $300 billion in 2021.

Exhibit 2: Refunding Versus New Money Issuance
Refunding Versus New Money Issuance
Source: The Bond Buyer. As of 30 Nov 21. Select the image to expand the view.

Market participants hoped that federal policy would support a robust 2022 supply year to satisfy the increasing demand from both tax-exempt and taxable markets. However, the Infrastructure Investment and Jobs Act (IIJA) and the latest draft of the Build Back Better spending bill did not include significant provisions to bolster municipal supply, either through a revival of a taxable direct pay program (similar to the BABs program) or through a reinstatement of tax-exempt advanced refunding. While the infrastructure legislation does include an expansion of private activity bonds (PABs) which should support new issuance, healthy municipal issuer balance sheets could diminish borrowing needs. Therefore, Western Asset anticipates 2022 issuance to be only modestly higher than 2021 levels which, when combined with ongoing redemptions, should continue to contribute to a favorable technical backdrop for tax-exempt municipals in 2022.

Exhibit 3: Municipal Bond Yields and Index Return
Municipal Bond Yields and Index Return
Source: Bloomberg. As of 10 Dec 21. Select the image to expand the view.
Exhibit 4: Tax-Exempt Muni Valuations
Tax-Exempt Muni Valuations
Source: Bloomberg. As of 10 Dec 21. Select the image to expand the view.
© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.