The Muni Market Is Rallying, As Outflows Abate, And The "Crossover Buyer" Enters The Market

For the last several weeks, munis have actually been rallying.

Citi’s George Friedlander lays out four reasons

  • First and foremost, better-quality munis had simply gotten too cheap, with market pressures indiscriminately taking yields higher across the credit spectrum. Since then, the market has begun to get more selective, with better-quality paper outperforming on the back of very solid demand from “crossover” buyers — institutional investors who bought munis for a total return opportunity, despite a limited ability or an inability to benefit from the tax exemption.
  • Secondly, pressures generated by muni bond fund outflows appear to have begun to abate, although the Lipper/AMG Data numbers remain quite negative (see “Demand Patterns,” below).
  • Thirdly, new issue supply has remained extremely soft, with total issuance through 2/28 at a paltry $28.6 billion, down 52.0%, and tax-exempt issuance at $22.5 billion, down 43.7% (see “Supply Patterns,” below).
  • Finally, it appears that some of the most extreme credit fears have subsided, despite the continuing “noise” regarding state and local near- and long-term budgetary pressures.

Here’s a look at muni fund flows:


Photo: Citi

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