Municipal bonds this month showed that all credit markets are vulnerable to the worry over interest rates remaining high, producing their worst performance since September.
US state and local debt is on track to post a loss of 1.24% in April, according to Bloomberg indexes. Treasury and other debt markets have been selling off as economic data indicates persistent inflation pressures.
Wall Street firms and investors have tempered their expectations for interest-rate cuts in 2024, now anticipating the Federal Reserve will hold borrowing costs at a more than two-decade high at its meeting on Wednesday.
The gloom has affected the muni market, which at times can continue to attract investors because of the tax-exempt status of state and local securities. But mutual funds, a key buyer in the marketplace, have seen choppy demand.
And borrowing by municipalities has picked up, which can weigh on prices. In April, state and local debt sales climbed more than 20% year-over-year to about $39.5 billion, according to data compiled by Bloomberg.
“Supply finally went up, and that’s a headwind,”said Kathleen McNamara, senior municipal strategist at UBS Global Wealth Management.
Still, municipals outperformed US Treasuries, which are poised to end April with a 2% drop.
“I would argue it’s actually not been such a tough month, for munis on a relative basis — it’s been a tough month for fixed income,” said Paul Malloy, head of municipal bonds at the Vanguard Group Inc.
Malloy said he still thinks muni yields are attractive for investors. The selloff so far this year has caused the yield on triple A, 10-year municipals to climb to nearly 2.8%, up about 50 basis points from the start of the year.
And better muni market dynamics could be ahead.
While Barclays strategists led by Mikhail Foux called the month a “cold April” for munis, they said things could turn in the summer. They noted that the muni market would likely be buoyed by technical factors in the summer, when bond sales slow down and investors receive more principal and interest payments that they look to reinvest.
And strategists at Bank of America Corp. called for a market rebound in May. “The market will likely turn in the first week of May, we think,” they said.
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