Despite concerns of a rising rate environment, municipal bonds and related exchange traded funds continue to rally, with yields at their lowest in 11 months on a dearth in new local and state debt issuance.
Meanwhile, benchmark 10-year Muni bond yields are hovering around 2.35%, the lowest level since June, reports Brian Chappatta for Bloomberg. Bond prices and yields have an inverse relationship.
Munis have strengthened on renewed demand for fixed-income securities and the lowest new municipal bond issuance in three years, outperforming Treasuries, corporate debt and the broader stock markets.
State and local issuance through May 2 was only $86 billion, the lowest amount of new sales since 2011. On the demand side, investors have increased assets into muni-related funds in 12 of the 17 weeks this year, according to Lipper.
“High-grade munis is a momentum sector,” Vikram Rai, a fixed-income strategist at Citigroup Inc., said in the article. “It’s not cheap by any standard.”
However, Citigroup analysts now argue that gains could be near an end. Specifically, they warn that munis could take a hit once supply picks up.
“The moment supply picks up,” yields will rise, Rai said. “There’s very little cushion before you’ll get a negative return for the rest of the year. Investors have to be careful — there is more downside risk than upside.”
iShares National AMT-Free Muni Bond ETF
For more information on the munis market, visit our municipal bonds category.