Summer issuance doldrums in perspective

In the world of municipal bonds, summer often brings a slowdown in new issuance. This seasonal supply dynamic occurs during what is often the busiest time of year for municipal bonds to mature, have their calls exercised, and make semiannual payments. Demand can potentially outstrip the supply of available bonds in this environment, resulting in tighter relative valuations—municipal-to-Treasury yield ratios and spreads. As we approach the summer months, this negative net supply scenario seems likely to play out once again here in 2024, creating a potentially challenging environment for municipal bond investors.

Exhibit 1: Municipal bond issuance

Source: SIFMA US municipal bonds--issuance, public. Data as of 4/2/24. Excludes private placements. All issuance figures are based on deals with maturity of 13 months or greater. For more information, see: https://www.sifma.org/wp-content/uploads/2021/12/US-Municipal-Bonds-Statistics-SIFMA.xlsx.

Upcoming challenges for muni market investors

With fewer municipal bonds entering the market and investors set to be flush with cash from maturing bonds and coupon payments, competition for available securities often intensifies over the summer. As a result, prices tend to rise and yields fall, resulting in tighter relative valuations. In this environment, investors searching for yield may find themselves increasingly challenged as they attempt to balance risk-related considerations with potential return opportunities. As the pool of available high-quality investments at attractive yields begins to shrink, market participants often seem to find themselves either accepting lower potential returns or taking on additional risks. Tight relative valuations and ratios can also affect portfolio construction and asset allocation relationships, potentially requiring investors to readjust their risk tolerance thresholds and investment objectives. In select instances, investors with existing bond portfolios can benefit from proactively selling short-term holdings that mature during the summer months in order to reinvest ahead of these negative net supply conditions.

Our viewpoint on this summer supply-and-demand dynamic

Strategies such as temporarily extending duration or venturing into lower-rated securities may be appropriate to enhance yield potential, but both approaches present their own relative risks. Overall, the combination of noticeably light summer issuance patterns and negative net supply constraints can create a challenging environment even for savvy municipal bond investors. Navigating this constantly evolving landscape requires careful analysis, disciplined portfolio management, and a thorough understanding of shifting municipal market dynamics, underscoring the potential benefits of employing an actively managed approach like Schwab Asset Management’s Wasmer Schroeder^™ Strategies.