Muni Rally Accelerates Prompting Calls for Year-End Return Surge

(Bloomberg) - Municipal bonds rallied the most in three months on Friday, continuing a recovery that began Thursday after a sharp selloff following the US presidential election.

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Benchmark state and local government yields fell by as much as 13 basis points as of 2:00 p.m. New York time. Those on 10-year, top-rated securities fell 10 basis points to 2.98% — the biggest daily decline since August, according to data compiled by Bloomberg. When muni rates climbed after the election —- trading in tandem with a rout in US Treasury securities — investors saw it as an opportunity to put cash to work, strategists said.

"A bullish reversal is underway for the muni market," wrote municipal strategists at Bank of America Corp. in a research note published Friday. "Current levels for all investment-grade munis are good entries for new long positions," according to the group led by Yingchen Li.

That trade should help boost returns for the rest of the year, when new issue bond sales are expected to taper off and demand for tax-exempt income stays elevated. Municipal debt has gained a modest 0.62% so far in 2024, according to the Bloomberg US Municipal Bond Index. The Federal Reserve's decision to lower interest rates by a quarter-point on Thursday was in line with market expectations and Fed Chair Jerome Powell eased investor concerns when he said it was still too early to consider the impact of the next government's fiscal policies.

"Given a stay-the-course, data-driven Fed, we maintain a buy-the-dip mindset with long-dated municipal market rates near their year-to-date highs," wrote Peter DeGroot, municipal strategist at JPMorgan Chase & Co. The rally has already unwound much of the post-election selloff, with yields of long-end securities lower than where they started the week.

Muni managers are "buying the duration that's available in the market right now," said Chris Brigati, director of strategic planning at SWBC. "Money is coming into the market."

Investors added about $1.3 billion to municipal-bond funds in the week ended Wednesday, according to LSEG Lipper Global Fund Flows data. The iShares National Muni Bond ETF, the biggest municipal-bond exchange-traded fund saw a $212.5 million inflow on Thursday, an influx more than 16 times the daily average over the last year, according to data compiled by Bloomberg. That fund, a bellwether for demand in the muni market, saw a large outflow on Wednesday.

That demand is also reflected in municipal valuations with some maturities hovering near their cheapest this year. The 10-year muni-Treasury ratio jumped to 71.5% on Thursday, according to data compiled by Bloomberg. That gauge is a key measure of relative value.

With such ratios "there is enough juice for a year-end rally," said Mikhail Foux, head of municipal strategy at Barclays Plc.

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