MuniLand: Econ 101- Municipals Teach Us the Basics of Supply & Demand

The municipal market continues its nearly year - long streak of positive fund inflows.

These flows have so far exceeded net issuance, which is part of the reason for positive total and excess returns in the sector. Year-to-date, the municipal market has grown by about $68 billon, a reversal from the prior two years wherein the total market had contracted about $2.0 billion. Looking into September, Bloomberg News reports visible supply continuing to exceed maturing bonds and announced calls, which can be easily absorbed by the current rate of inflows. Also according to Bloomberg, the four-week moving average for inflows is about $878 million. If the current trend continues, the muni market will have about $1.5 billion more demand than supply. This would signal that the muni market will continue to be well bid, which will keep spreads tight and possibly tighten them further.

A vote for infrastructure?

Looking past September into November’s ballot initiative and presidential election season, we see potentially significant spending authorization for infrastructure. For example:

  • Detroit is requesting $4.6 billion over 20 years for a regional transit authority
  • Seattle is asking for $54 billion over 25 years towards expanding the light rail
  • Los Angeles is looking to make permanent a sale tax increase for highway improvements
  • Atlanta is seeking $2.4 billion for better bus service and expanded rail routes
  • Also, both presidential campaigns are delivering stump speeches in favor of infrastructure spending as a way of boosting the U.S. economy. Additional supply would be welcome in a market where valuations are looking stretched. However, we do not anticipate an immediate increase in supply since ballot initiatives and subsequent debt issuance are spread out over long periods of time. So far, details on proposed infrastructure spending from the presidential campaigns are still forthcoming, and it is possible that debt could be issued in the taxable markets.

    Supply and demand outlooks are a key component of our municipal sub-sector monthly analysis and an important component of our expected return outlook. If the current trends in the municipal market continue, we may see continued outperformance from the sector.

    Source: Bloomberg News, Governing and SNWAM Research