(Bloomberg) — This month is perhaps a very good time for traders to stuff their portfolios with municipal bonds.
It’s not simply that tax-equivalent yields on munis are hovering round 10% for rich residents in excessive tax states like New York and New Jersey. It’s the monitor file. Since 2018, state and local-government debt has gained in November, in response to the Bloomberg Municipal Bond Index. And during the last 10 years the month has posted constructive returns seven occasions.
Seasonal provide and demand dynamics assist to clarify why. Municipal issuance tends to be slower in November and traders sometimes have additional cash available from coupon funds than out there debt to buy. Citigroup Inc. estimates that the money traders obtain from bond funds will exceed the quantity of state and local-government bond gross sales by $3 billion in November.
“One of many essential the explanation why we like being lengthy in November is as a result of provide begins trending down,” stated Mikhail Foux, head of municipal technique at Barclays Plc.
The quantity of debt anticipated to be offered over the subsequent 30 days is about $5.5 billion, or $3 billion lower than the 12-month common, in response to knowledge compiled by Bloomberg.
In fact, previous efficiency doesn’t assure future outcomes. The November successful streak will likely be examined this yr if the economic system defies expectations and strengthens. As well as, tax-loss harvesting — the place traders promote securities which have dropped in worth and reinvest in comparable, higher-yielding bonds — might weigh in the marketplace.
Nonetheless, Barclays likes the muni market’s prospects for this month and the remainder of the yr. The agency recommends traders begin including higher-rated, longer-maturity debt with coupons larger than 5% and callable in 10 years.
Along with a downturn within the provide of bonds, Barclays tasks the economic system will gradual to a 2% annual charge within the fourth quarter, from a sturdy 4.9%, easing stress on the Federal Reserve to boost charges and boosting bond costs. Curiosity-rate futures put the possibility of a charge improve Wednesday afternoon close to zero and only a one-in-five likelihood of a hike in December.
Muni mutual fund outflows are additionally comparatively low, tallying about $900 million final week, indicating traders are getting extra sanguine in regards to the market, stated Foux.
“You will have geopolitical dangers, you have got issues in regards to the US economic system, and all people’s speaking about recession in 2024,” he stated. “So if charges begin trending decrease and folks cease taking cash out of munis, I believe that’s all constructive.”
Positioning for the brand new yr additionally tends to offer the market a lift within the last two months of the yr, Foux stated. Traders purchase bonds to benefit from one other, extra distinguished, seasonal development, when a flood of principal and curiosity funds have a tendency to return into the market at the beginning of the yr.