See a Fork in the Road?

Yogi Berra said, “pick it up”. Common sense asks, “Why is it there?”. In this instance, the fork in the road represents a current dichotomy of opinion: how will our fixed-income markets, specifically the municipal market, perform this summer?

Research commentaries from Barclays and Bank America Merrill Lynch (“BofA”) effectively present their differing opinions on the direction the market will take over the next three months.

Barclays suggests that the burgeoning supply dynamics will continue throughout the summer, effectively capping the downward movement of yields in the muni space.¹ Although June and July are typically months where many bonds mature and coupon payments are made, evidence of uneven flows in previous weeks supports the notion that absent a reversal in guidance from the Federal Reserve (“Fed”) and a move to lower rates, a rally is unlikely.

BofA securities, however, build its outlook on technical observations which include²:

• The announced start of Quantitative Tapering in June will reduce the monthly runoff of Treasuries holdings, leading to a bull steepening of the curve. Any move by Treasuries to lower yields will pull municipals along with it.
• Perceived weakening implied in the economic data released in April, possibly pointing to a softening of the labor market, would underpin a Fed decision to consider moving rates lower – sooner.
• Continued demand from seasonal reinvestment (maturities and coupon payments) and the normal improvement in the buy/sell ratios at quarter end will likely be supported by the continuing inflows seen, especially in the SMA platforms. Hence, a summer rally.

These two views certainly have their merits. But still trying to understand the Fork? It would seem to us that capturing tax-exempt flow in an exchange-traded fund (“ETF”), such as the VanEck Intermediate Muni ETF (ITM), might be a good parking spot until evidence points you in which direction to go.

Originally published 17 May 2024. 

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Important Disclosure and Definitions

¹ BofA Securities Municipals Weekly, Macro conditions and Market Technicals Equals Multi-Month Muni Rally. Industry Overview, May 3, 2024.

² Barclays FICC Municipal Research, May 10, 2024.

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