(Bloomberg) — Municipal bond buyers scooped up an abundance of debt sales last week, eager to lock in higher yields before the Federal Reserve is widely expected to lower interest rates for the first time in more than four years.
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States and local governments sold more than $14 billion of debt in the week ended Friday, one of the largest weekly amounts of the year and 79% more than the five-year weekly average, according to data compiled by Bloomberg. Borrowers are rushing to market ahead of potential volatility before the US presidential election in November. Long-term municipal bond issuance is up more than one-third over 2023’s pace.
“These next couple of weeks are basically the last chance to stock up on decent yields,” said Dora Lee, research director at Belle Haven Investments. She said that recent transactions, including one by New York City, garnered healthy demand from investors.
Read more from Bloomberg Intelligence: Munis Pack Up Supply Ball and Go Home Ahead of Fed Rate Move
New York City’s Transitional Finance Authority lowered yields one to seven basis points on its $1.5 billion tax-exempt bond deal, as investors place orders for almost three times the amount of bonds available, depending on the maturity, according to a city news release.
Despite the heavy supply, muni prices remained resilient. Ten-year, top-rated muni yields both started and ended the week at a 2.61%, illustrating the strong level of buyer interest. That’s made more impressive because reinvestment demand from coupon and maturing bonds is far lower in September than over the summer when it props up valuations. On Sept. 10, municipal bonds reached their cheapest levels relative to US Treasuries since November 2023, according to data collected by Bloomberg.
“Supply is being absorbed really well,” said Jeremy Holtz, portfolio manager at Income Research + Management. He said that the potential for lower interest rates is a major factor for investors adding cash to muni-bond funds.
Such funds collected about $1.3 billion during the week ended Wednesday, according to LSEG Lipper Global Fund Flows data.
Washington, DC brought $1.6 billion of debt to market on Sept. 10, in a sale that raised money to refinance existing debt and to fund new projects. That transaction received more than $10 billion of orders from 106 different investors, according to Drew Gurley, a managing director at Siebert Williams Shank, which underwrote the transaction. That demand allowed the district to lower yields by as much as 11 basis points, he said.
Sales are expected to drop off this week as governments generally avoid coming to market when the Federal Open Market Committee meets. However, issuance is likely to inch back up with about six weeks until the election. Borrowers have already lined up about $15.5 billion of sales over the next 30 days, according to data compiled by Bloomberg.
“Supply is going to continue to come in very large numbers,” Holtz said. “It’s all about the election and issuers are trying to get ahead of that. Last week was really well absorbed and the big question is whether that’s going to stay.”
–With assistance from Erin Hudson.
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