Large redemptions bode well for muni market performance

Bonds

Reinvestment demand will remain strong in July, as large redemptions will support technicals and lead to positive returns.

June saw $42.4 billion of redemptions, the highest redemption figure since August 2023, helped the muni market as new-issue buying last month was “pretty strong,” said Pat Luby, head of municipal strategy at CreditSights.

Net supply for the month totaled negative $5.2 billion, Luby noted.

July will see $35.2 billion of redemptions, down 13% month-over-month but still 35% higher than 2024’s monthly average of $27 billion, he said, noting the total redemptions 76%, or $26.8 billion, was paid out July 1. Net supply for July is expected to be at negative $320 million, he noted.

Redemptions will peak in August at $43 billion, providing a “nice boost” to demand for investors, he said.

However, after the “redemption music” stops in August, issuers will look to borrow in between Labor Day and Columbus Day, at a time when reinvestment demand will be low. Redemptions will fall to $17.7 billion in September, Luby noted.

With the heavier redemption months, investors are “typically looking to either replace those investments and/or add,” said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

This year’s higher-than-average redemption levels will lead to some moderate to above-average demand, he said.

“Summer redemption season is the time of year when cash coming back to investors is the most sizable,” said Eric Kazatsky, head of municipal strategy at Bloomberg Intelligence.

“In a normal rates (upwardly sloping curve) and issuance environment, demand should well outstrip supply, and returns should find a favorable tailwind,” he said.

With June 2024 seeing the best performance for the month since 2000, “continued summer tailwinds could help July performance,” Kazatsky said.

If “hot” economic data can be avoided, he said, “July is primed for positive performance, with only two years of negative monthly returns over the last 20.”

July will see $35.2 billion of redemptions, down 13% month-over-month but still 35% higher than 2024’s monthly average of $27 billion, said Pat Luby, head of municipal strategy at CreditSights.

Summer redemptions, though, could prove to be “too much of a good thing” because muni-UST ratios are fairly rich, especially inside 12- to 13-years where it is priced only to make sense for the highest tax bracket of individual investors, according to Luby.

Others, like banks and insurance companies, would like to get exposure to munis but at low ratios to Treasuries and low ratios to corporates, “it’s difficult to justify,” he said.

So, Luby said, more demand from investors in the 37% tax bracket leads to further frustration from those investors who like to diversify into munis but can’t justify these ratios.

Despite this, as an “outsized amount” of reinvestment money returns to the muni market, “issuers are taking advantage” of it as they continue to issue “outsized amounts of deals almost on a weekly basis,” said Anders S. Persson, Nuveen’s chief investment officer for global fixed income, and Daniel J. Close, Nuveen’s head of municipals, in a June 24 report.

The $42.4 billion of redemptions in June helped “stoke” demand for the month’s increase in issuance year-over-year, Luby said.

June’s issuance was “strong,” though Kozlik is unsure if July and August will see issuance of that caliber.

“There’s still a decent amount of bonds out there, but if we get to a situation where the rest of the summer or the beginning of the fall, and there isn’t primary market issuance, there won’t be as many bonds out there for individual or institutional investors,” he said.

At the very least, there will be some “easing” of supply in July — despite some “blockbuster” deals already on the calendar — due to “losing” the first week of the month to the Fourth of July holiday, Luby said.

“When folks get back next week, there should be some cash waiting to put to work against the new deals,” he said.

The “continued need to reinvest redemption proceeds in July … suggests ongoing support for tax-exempt paper over the next several weeks,” said Chris Brigati, senior vice president and director of strategic planning and fixed income research at SWBC.

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