The short-term correction has opened up an opportunity, with long-term AAA-rated munis yielding more than U.S. Treasuries. Currently, 30-year Treasuries yields are 3.10%, compared to the 3.15% yield on benchmark 30-year Municipal bonds.
“I believe that the muni asset class has not been as attractively valued in the 10-30 year maturity range since back on June 24 and March 17 of this year,” Colby added.
Similar to a previous period in October 2015, investors enjoyed a valuation opportunity that marked the beginning of a year of positive performance in munis, with the over 50 consecutive weeks of inflows into municipal bond open end mutual funds and ETFs.
Looking ahead, muni fundamentals also look favorable. The projected December 2016 cash flow of $35 billion from maturing bonds is expected to be the largest ever in any December in history of the munis market, which could mean an influx of demand ahead. If one includes coupon payments, the total amount of reinvestment cash that could be available at end of December is about $46 billion, Colby said. In contrast, 30-day visible supply was at $16.8 billion.
“This should place enormous pressure on supply,” Colby added. “Even if only half of the reinvestment cash is deployed back into munis, demand would be well in excess of supply.”
For more information on the munis market, visit our municipal bonds category.