As we step into the second quarter of 2024, the municipal bond market is presenting a landscape filled with both challenges and opportunities.
Current factors shaping the market include an increased supply of bonds, rising yields influenced by the sell-off in U.S. Treasuries, tempered expectations for rate cuts, and the seasonal trend of selling munis.
Market Dynamics at Play
New issue supply continues to be robust, representing the opportunity for investors to purchase the latest bond offerings. Many Wall Street research analysts have revised their issuance expectations upwards for the year.
The week of April 8th has seen a visible supply beginning at $13.9 billion, the highest since October 18th of last year. This surge is part of a broader trend, with states and municipalities having sold $104.4 billion in long-term bonds year-to-date, marking a 29.2% increase over 2023’s pace.
With new issue offerings setting the tone for the market, investors have the opportunity to diversify their portfolios with new issues priced to move.
The sell-off in U.S. Treasuries led to an increase in yields across the board, with the UST 10yr topping 4.50% for the first time since November. We have been consistently finding solid muni credits with yields over 3.00% and taxable equivalents of 5.25%+ on the short end and 5.50%+ on the long end of the curve.
With the Federal Reserve signaling a cautious approach towards monetary easing, expectations for near-term rate cuts have diminished. Inflation data for March came in hot, with markets now predicting a less than 20% chance of a rate cut in June - down from 80% a month ago.
April often experiences an uptick in muni bond selling as some investors liquidate holdings to cover tax liabilities. This seasonal factor can temporarily depress prices, creating buying opportunities for discerning investors.
The Next Move
So how can investors participate in this ripe landscape? By locking in attractive taxable equivalent yields now while leveraging the barbell strategy.
The municipal yield curve is inverted in the short end, steep from 10 to 20 years, and levels off out to 30 years. By customizing a portfolio with our barbell strategy, buying short and longer intermediate bonds, investors can pick up incremental additional yield while maintaining a reasonable duration.
How Can We Help?
Riverbend Capital is a boutique separate account manager, customizing each bond portfolio according to investor parameters and goals. Tax implications of clients’ state of residence, their risk appetite, their investment objectives, how muni bond exposure fits within their broader portfolio, and their time horizon drive our bond-buying decisions, as we construct each customized portfolio.
By treating each investor uniquely and managing their investments separately, we strive to help our clients achieve the maximum benefit from their municipal bond allocation.