Much of the muni commentary these past several days has focused on what, to some, may have been the surprising and meaningful performance of the asset class as measured by the Barclays Municipal Bond Index: 5.91% year-to-date (YTD) as of 6/4/14.
I believe the primary driver of performance this year has been the imbalance of newly issued municipal bonds coming to market to meet demand. The forward 30-day visible supply may now have reached what I believe to be meaningful levels (see chart). The rise in the market has taken a pause to seemingly await the arrival of the new bonds.
30-Day Visible Municipal Bond Supply (as of 6/4/14)
- Total Supply on 6/4/14: $13.6 billion
- 2014 YTD Highest Supply (on 6/3/14): $15.0 billion
- 2014 YTD Lowest Supply (on 3/7/14): $1.9 billion
Source: Bond Buyer. The 30-day visible supply is compiled daily from The Bond Buyer’s Competitive and Negotiated Bond Offerings calendars. It reflects the dollar volume of bonds expected to reach the market in the next 30 days. Issues maturing in 13 months or more are included.
If you remember a year ago, the “Taper Tantrum” pushed rates higher by almost 100 basis points (1%), just at the suggestion of the Federal Reserve slowing its bond buying program. I don’t currently see evidence or trends to suggest we will see that kind of jump again in the near term.
The municipal bond market, in my opinion, continues to offer potential value across the yield curve and the credit spectrum. I believe this has been recognized by institutional buyers. However, in my opinion, the significance of the tax exemption often goes underappreciated when investors get caught up with “trends” or secular market moves.
The Barclays Municipal Bond Index covers investment-grade municipal bonds with a nominal maturity of one or more years.