The municipal market took a
welcome turn in September
, notching its first positive month since April. It was sweet
vindication for those of us who knew the summer selloff was
fundamentals underlying the market
just didn't warrant the type of pounding that the market was
I've talked in prior posts about what's been driving the
recent volatility. At the risk of sounding like a broken record,
it's not Detroit … or Puerto Rico … or any other idiosyncratic
credit event. It's been interest rates … the Fed … and how Fed
action might influence interest rates.
What I haven't talked about is supply, which happens to be a
big deal in the municipal space and (no surprise) has been
impacted by interest rates this year. Here's what investors
Supply is down.
New issuance is 13% lower in 2013 than it was this time last
year, according to data from Thomson Reuters. Why? Because
interest rates (and, therefore, borrowing costs) are up.
Municipal market issuers took advantage of last year's
historically low rates to refinance existing bonds and to issue
new debt on favorable terms. Higher rates this year, and the 2012
rush to take advantage of low rates, means less incentive (and
perhaps less need) in 2013.
'Tis the season.
We are entering a seasonal period when municipal bond issuance is
typically very low and may not ramp up until the end of first
quarter 2014. That phenomenon may be exaggerated this year when
you factor in the effect of a
and D.C.-induced uncertainty in the broader economy. Issuers may
be more inclined to "wait and see" before bringing any big
A shrinking market.
Longer-term, supply could continue to shrink as municipalities
are less likely to embark on large infrastructure projects,
particularly in a higher-rate environment.
Putting it all together, good bonds may be harder to find.
Limited supply in the market could make it harder to source
attractive opportunities. For the most part, we've been seeing
new issues priced at a concession to the
- but price isn't everything.
Diligent credit research
is critical to separating the wheat from the chaff, particularly
when the field is smaller and it can be tempting to pluck the
A discussion of supply would not be complete without looking
at the other side of the equation: demand.
Given the performance challenges this year, demand for
municipal bonds has been muted. In fact, most of the buying has
been done by non-traditional investors who have come to recognize
the compelling risk/reward available in munis. Going forward, a
pick-up in demand could create supply, as issuers are more apt to
come to market when they think there might be a captive audience
for their bonds.
For now, the market remains in a pattern of net negative
supply (more bonds leaving the market than coming in), which
could be a price tailwind in the months ahead given the factors I
cited above. With the
having created greater income opportunities (and an attractive
entry point) for investors, now may be the time to jump back in
before the new year rush creates demand - and munis' price tag
Peter Hayes, Managing Director, is head of BlackRock's
Municipal Bonds Group and a regular contributor to
You can find more of his posts