(Bloomberg) -- This month might be a good time for investors to stuff their portfolios with municipal bonds.
It’s not just that tax-equivalent yields on munis are hovering around 10% for wealthy residents in high tax states like New York and New Jersey. It’s the track record. Since 2018, state and local-government debt has gained in November, according to the Bloomberg Municipal Bond Index. And over the last 10 years the month has posted positive returns seven times.
Seasonal supply and demand dynamics help to explain why. Municipal issuance tends to be slower in November and investors typically have more cash on hand from coupon payments than available debt to purchase. Citigroup Inc. estimates that the cash investors receive from bond payments will exceed the volume of state and local-government bond sales by $3 billion in November.
“One of the main reasons why we like being long in November is because supply starts trending down,” said Mikhail Foux, head of municipal strategy at Barclays Plc.
The amount of debt expected to be sold over the next 30 days is about $5.5 billion, or $3 billion less than the 12-month average, according to data compiled by Bloomberg.
Of course, past performance doesn’t guarantee future results. The November winning streak will be tested this year if the economy defies expectations and strengthens. In addition, tax-loss harvesting — where investors sell securities that have dropped in value and reinvest in similar, higher-yielding bonds — could weigh on the market.
Barclays’ Call
Still, Barclays likes the muni market’s prospects for this month and the rest of the year. The firm recommends investors start adding higher-rated, longer-maturity debt with coupons greater than 5% and callable in 10 years.
In addition to a downturn in the supply of bonds, Barclays projects the economy will slow to a 2% annual rate in the fourth quarter, from a robust 4.9%, easing pressure on the Federal Reserve to raise rates and boosting bond prices. Interest-rate futures put the chance of a rate increase Wednesday afternoon near zero and just a one-in-five chance of a hike in December.
Muni mutual fund outflows are also relatively low, tallying about $900 million last week, indicating investors are getting more sanguine about the market, said Foux.
“You have geopolitical risks, you have concerns about the US economy, and everybody’s talking about recession in 2024,” he said. “So if rates start trending lower and people stop taking money out of munis, I think that’s all positive.”
Positioning for the new year also tends to give the market a boost in the final two months of the year, Foux said. Investors buy bonds to take advantage of another, more prominent, seasonal trend, when a flood of principal and interest payments tend to come into the market at the start of the year.