skip navigation

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

July 12, 2022

Weekly Municipal Monitor—Stalling Summer Supply

By Sam Weitzman

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

Municipals Posted Positive Returns Last Week

Munis posted positive returns last week and outperformed Treasuries across the curve. High-grade municipal yields moved 10-17 bps lower across the curve while municipal mutual fund outflows continued at a record pace. The Bloomberg Municipal Index returned 0.79% while the HY Muni Index returned 0.99%. This week we evaluate seasonal summer net supply trends which could strengthen market technicals.

Fund Flows Continued While Supply Was Limited During the Holiday-Shortened Week

Fund Flows: During the week ending July 6, weekly reporting municipal mutual funds recorded $313 million of net outflows, according to Lipper. Long-term funds recorded $85 million of outflows, high-yield funds recorded $159 million of inflows and intermediate funds recorded $313 million of outflows. The week’s fund outflows extend the record outflow cycle to $77.7 billion.

Supply: The muni market recorded $4.7 billion of new-issue volume, down 54% from the prior week due to the holiday-shortened week. Total year-to-date (YTD) issuance of $211 billion is 7% lower than last year’s levels, with tax-exempt issuance trending 3% higher year-over-year (YoY) and taxable issuance trending 38% lower YoY. This week’s new-issue calendar is expected to increase to $10 billion. Large deals include $1 billion Colorado Health Facilities Authority and $542 million Dallas Fort Worth Airport transactions.

This Week in Munis: Stalling Summer Supply

Net municipal supply levels indicate whether the municipal market is growing or shrinking, and can inform market entry points. Net municipal supply considers new issuance less redemptions associated with bond maturities and embedded call options that allow issuers to refinance outstanding debt.

In June 2022, the muni market recorded the highest level of bond redemptions since June 2016, as matured and called debt surpassed $60 billion. Paired with $39 billion of monthly new-money issuance, on a net basis, the stock of municipal market debt outstanding shrank by $21 billion in June, marking the lowest level of net supply since July 2017.

Exhibit 1: Monthly Net Muni Issuance
Explore Monthly Net Muni Issuance
Source: Bloomberg, Western Asset. As of 30 Jun 22. Select the image to expand the view.

As highlighted in Exhibit 2, 1H22 net supply of -$23 billion contrasts 1H20 and 1H21 positive net supply levels of +$21 billion and +$48 billion, respectively. While first-half of the year new-money issuance was in-line with the prior two-year average at $211 billion, this year’s level of current refunding was nearly two times the prior two-year average. Considering the 2017 Tax Cuts and Jobs Act restricting of tax-exempt advanced refunding, it is not surprising to see a ramp-up of redemptions from bonds that reach their call date which could have otherwise been pre-refunded in prior years.

Exhibit 2: Cumulative Net Muni Supply
Explore Cumulative Net Muni Supply
Source: Bloomberg, Western Asset. As of 30 Jun 22. Select the image to expand the view.

Municipal valuations are increasingly driven by supply and demand technicals, and this year’s negative market performance has been more indicative of the outflows from municipal mutual funds than the tighter supply conditions. However, these negative supply conditions likely offset some of the potential negative performance that could have been otherwise realized with this year’s record municipal fund outflow cycle. Moreover, we anticipate negative net supply conditions to continue as $65 billion of municipal debt is scheduled to mature in July and August. Reinvestment of these maturities paired with attractive after-tax relative valuations that can attract demand to the municipal asset class, can buoy market performance amid any additional market volatility and set the stage for a stronger technical dynamic heading into the back half of 2022.

Exhibit 3: Municipal Bond Yields and Index Returns
Explore Municipal Bond Yields and Index Returns
Source: Bloomberg. As of 08 Jul 22. Select the image to expand the view.
Exhibit 4: Tax-Exempt and Taxable Muni Valuations
Explore Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg. As of 08 Jul 22. Select the image to expand the view.
© Western Asset Management Company, LLC 2022. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
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 Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. 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.