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For Muni Investors, It's Been a Dry January

In November, municipal bonds gained 6.35%, their best single month since August 1982. In January, munis posted a loss of 1.05%.

(Bloomberg) -- For municipal-bond performance, its been an undeniably Dry January. 

So far this month, municipals posted a loss of 1.05% after closing 2023 with back-to-back months that lifted the entire year, according to data compiled by Bloomberg. Typically, munis post solid gains in January, registering a negative performance only in the Januarys of 2018 and 2022.  

“I think that 2024 started last November when investors came in to snap up the much higher yields,” said Pat Luby, a municipal strategist at CreditSights Inc.  

In November, municipal bonds gained 6.35%, their best single month since August 1982, according to the Bloomberg Municipal Bond Index. They tacked on another 2.32% in December as investors embraced the narrative that the Federal Reserve had finished raising interest rates and would soon lower them. 

“With the market having rallied so much and now shifting to figure out when the Fed will start cutting rates, I think that there is less urgency than usual to put cash to work,” Luby said.

On Oct. 30, top-rated municipal bonds maturing in 10 years yielded 3.63%, according to the BVAL benchmark. On Tuesday, they began at 2.53%.

“There’s only so much juice you can get from this asset class and we are squeezed at the moment,” said Peter Block, managing director and head of municipal strategy at Ramirez & Co. Inc. 

Supply has also upset the usual dynamic. New municipal bond sales are typically heavy in December and light in January. In 2023, states and localities sold $22.5 billion in long-term debt, below the $29 billion average seen in Decembers since 2013. By comparison, they have sold $28.4 billion so far in January, well above the $25 billion average.

And then there’s demand. In January, more than $23 billion in bonds matured and another $5.5 billion were called, according to data compiled by Bloomberg, just about matching issuance. All that money is usually reinvested in munis. In February, $27.5 billion is expected to mature. That declines to $21.6 billion in March and $16.7 billion in April.  

Analysts expect that boost in issuance to continue amid a more benign rate climate, Dawn Mangerson, head of municipal portfolio management at Loomis, Sayles & Co., said in an email. “We view this as a positive in terms of being able to invest and reposition portfolios more efficiently than has been the case during the relatively poorly supplied market of the past couple years,” she added.

John Kemnitzer, vice president and wealth fund manager at Johnson Financial Group, observed that the outlook remains favorable despite the cooling performance, especially when viewed against the coming redemptions and rate-cut expectations. “Muni demand should continue to be supported by investors looking to take advantage of attractive yields by moving out of cash and other short-maturity strategies,” he said.     

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