US state and city debt is poised for its worst month since February, with yields not far below multiyear highs. As the municipal market heads into a historically weak period, the worry is that it’s still not attractive enough to lure buyers.
(Bloomberg) — US state and city debt is poised for its worst month since February, with yields not far below multiyear highs. As the municipal market heads into a historically weak period, the worry is that it’s still not attractive enough to lure buyers.
Munis have declined about 1.5% in August through Wednesday, on track for the grimmest performance since a 2.3% slide in February, according to Bloomberg index data. Fixed-income assets have declined broadly this month with the Federal Reserve signaling that it may keep hiking interest rates to muffle a still-robust economy.
The performance over the past decade argues against betting on an imminent rebound for the muni index: The gauge has dropped 0.4% in September on average in the period, the weakest return of any month. What’s more, even after their August slump, munis are still on the costly side relative to alternatives like Treasuries, says Eric Kazatsky at Bloomberg Intelligence.
“Munis are not cheap enough yet,” the senior US municipals strategist said in an interview. Treasuries, or “even single- or double-A corporate rates, they’re much more attractive. They’re much larger markets and have a lot more liquidity.”
A gauge of relative value in munis has improved this month. But that measure, which compares the level of muni yields to those on Treasuries, still shows munis are costly on a historical basis. That’s in part as sales of new US state and local-government bonds are poised to dwindle for a few weeks.
Read more: Ebbing Muni Sales Limit Pain With Market Set for Monthly Drop
The ratio of benchmark 10-year muni yields to rates on 10-year Treasuries is about 70%, compared with the average of around 90% since 2000. Yields on munis, which typically offer tax-exempt income, tend to be lower than those on Treasuries.
With volatility in rates likely to be more muted going forward, it points to a better setup for reinvestment flows into fixed income, BI’s Kazatsky and colleague Karen Altamirano wrote in a research report this week. Nonetheless, they still anticipate flat muni returns in September, in part as supply likely outpaces demand.
Read BI’s research: Do You Remember, the Softer Tax-Free Returns of September?
However, Eve Lando, portfolio manager at Thornburg Investment Management, sees promise.
There is pent-up demand, she says, for issuers to borrow for routine things like deferred maintenance, so supply should eventually pick up and improve the muni market’s relative value. What’s more, yields are looking attractive in some areas.
“We’re talking about fixed income with yields that are similar to equity returns and highlighting the kind of the stability of the sector,” she said. “So far we have not seen any reasons to have a credit worry. So I think there’s lots of things working for the muni market as of now.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.