Muni Yields Dip as Investors Seek Safe Haven Amid Middle East Tensions

Municipal bond yields fell on Tuesday, mirroring the decline in U.S. Treasury yields, as investors sought safe-haven assets amid rising tensions in the Middle East. Meanwhile, the primary market saw a surge of new issuance, with several competitive deals attracting strong demand.

Navigating the Muni Market's Shifting Landscape

Muni Yields Decline Amid Flight to Safety

The municipal bond market followed the lead of the U.S. Treasury market, with yields falling by up to six basis points across the curve. This flight-to-safety bid was driven by the escalating tensions in the Middle East, which prompted investors to seek the relative safety of government-backed securities.The muni-to-Treasury ratios also shifted, with the two-year ratio falling to 64%, the three-year to 65%, the five-year to 66%, the 10-year to 70%, and the 30-year to 86%. This indicates that municipal bonds have become more attractive relative to Treasuries, particularly at the longer end of the curve.

Robust Demand Offsets Surge in New Issuance

The municipal bond market has seen a significant increase in new issuance, with this week's slate expected to exceed $10 billion. However, the strong demand from investors has helped to absorb the additional supply.According to Nuveen's chief investment officer for global fixed income, Anders S. Persson, and the firm's head of municipals, Daniel J. Close, the muni market has "absorbed" the outsized new issuance, which is expected to continue for the next few weeks.Daryl Clements, a municipal portfolio manager at AllianceBernstein, echoed this sentiment, stating that the "persistent inflows into our market and investors are still sitting on plenty of cash" have been critical in helping to offset the surge in issuance.

Positive Performance Across Muni Segments

The municipal bond market has delivered strong performance across all segments in the third quarter. High-yield munis returned 3.21%, while taxable munis saw gains of 5.42%. The broader muni market, as measured by the Barclays Municipal Bond Index, returned 2.71% for the quarter.Clements noted that the "yield curve began to normalize, and credit continued to outperform" during the quarter, contributing to the positive returns. However, he also acknowledged that the technical picture was "more mixed" as both supply and demand remained robust.

Outlook for the Muni Market

Looking ahead, the municipal bond market is expected to face continued challenges from elevated net supply. Clements forecasts net supply of $15 billion for October, followed by negative net supply of $8 billion and $3 billion in November and December, respectively.Despite the anticipated surge in supply, the strong demand for tax-exempt income is expected to help mitigate the impact. Clements believes that "when net supply is negative, the market tends to outperform," which, combined with a dovish Federal Reserve and historically high yields, could create a favorable environment for the muni market.Furthermore, the primary market saw several notable deals this week, including a $1.117 billion Northwell Health offering from the Dormitory Authority of the State of New York, a $585.14 million Pennsylvania Turnpike Commission refunding, and a $252.12 million Colorado Higher Education Health Sciences Facilities deal, among others. These transactions were well-received by investors, underscoring the continued strength of the municipal bond market.