MUNI Market Update: 5% Yields, Resilient Demand, and Strategic Entry Points

• As we reported on June 10, Blackrock indicated that it is time to buy MUNI bonds, as supply is ample and prices are favorable ahead of the summer.  We have seen several challenges in the market, including higher rates, tariff concerns, deficit worries, and a hawkish Fed, along with the U.S. losing its top credit rating.  With all of this, longer-dated MUNIs are yielding close to 5% in some cases; as a result, the taxable equivalents are in the range of 7.5%.
• We have in the past discussed U.S. mass transit and how many agencies, such as the MTA, are grappling with weak ridership numbers and the evaporation of pandemic aid. Many of these systems are now under pressure from credit rating agencies, including the San Francisco Bay Area transit system.  This is a widespread issue and not just contained to MTA.  If you are buying this type of credit, it would be wise to have a discussion with us regarding the stability of the underlying credit quality.
• Forecasters indicated that underlying U.S. inflation likely increased in May, reflecting a modest impact from tariff pass-through for goods that are mostly imported.  The CPI was seen rising 0.3% from April, after increasing 0.2% the previous month, excluding food and energy.  Many, including us, feel the CPI number will hold here for a while; with the tariffs in place, the number could be pushed up slightly due to added cost pressures.
• Traders in the marketplace are betting there will be only one cut this year, and we tend to agree.  Sticky inflation will most likely cause the FED to hold rates steady at the June meeting next week. We suspect they will take a “wait and see” approach to assess the impact of any tariffs that could be imposed.
• We have discussed charter schools for a while; if you are buying this credit, you will need to ensure the underlying is solid or they are insured by a well-rated and managed insurance company.  A major financier of US charter schools filed for bankruptcy, blaming the pandemic-era subsidies that reduced demand for its services and disrupted a top stockholder.  If you would like to learn more, please don’t hesitate to contact us to discuss further.
• Consumers’ expectations for future price pressure improved across all horizons in May, and household pessimism about the labor market somewhat eased.  Median expectations regarding inflation one, three, and five years out have also decreased.  Overall, many feel inflation is edging down slowly, and the numbers support this notion.  However, the pricing for everyday products remains high.  As we have stated before, the FED will remain at these interest rate levels until we see clarity on tariffs.
• Overall, MUNIs have held firm despite the above point with heavy issuance.  Across the curve, MUNIs are up about 6bps, and the front end of the curve is firmer.  The bottom line is that MUNIs have held steady under this heavy issuance, with the calendar still elevated. Sustained inflows into MUNI funds and individual bonds have continued with strong momentum.

Historical Data on the 10-Year Treasury

This is the 10-yr yields from 6/2020 to date.