The U.S. municipal bond market is known for being many things: staid, stuffy, well-suited to capital preservation, if not growthy opportunity. But now, lopsided metrics of supply and demand, with no relief in sight, suggest it might be outright shrinking.
So far this year, issuance has been relatively stable. Through May, state and local governments had issued about $188 billion of bonds, according to data from the Municipal Securities Rulemaking Board, compared to $152 billion during the same period in 2019.“Bankers and buyers may both see less activity than needed, the influx of Federal cash and surging state and local revenues cut borrowers’ needs for working capital,” wrote analysts at Municipal Market Analytics in a June 7 note.
For now, those macro tailwinds are boosting demand beyond what might normally seem reasonable. A closely-watched metric, the ratio of 10-year muni yields to those of comparable U.S. Treasurys TMUBMUSD10Y, 1.459%, is about 60%, well below the more normal level of 80%, and suggesting investors are paying quite a bit more for muni bonds than sovereigns.
That means that in one section of the market, for high-yield munis, “there’s just not enough deals.” That was the conundrum facing the Invesco High Yield Municipal Fund, which announced in May that it would close to new investors.