Munis Closely Tracked United States Treasury Performance In September

For now, the muni asset class is turning in relatively strong performance with year-end returns having the potential to unlock higher levels. We believe that the current supply build has brought about more attractive relative value ratios, creating cheaper entry points for investors who not too long ago were still demonstrating strong retail demand despite substantively richer valuations. While we expect continued demand, outsized supply could not only create a sustained trajectory of slowing fund flows, but could also move ratios to cheaper ground. Again, investors are advised to closely monitor these relationships for potential opportunities. There continues to be ample amounts of deployable cash, and as we move closer to the seasonal year-end reinvestment cycle, inflows should hold strong and ratios could become more expensive.

As mentioned, muni technicals do provide directional influence to the asset class as a key driver of performance and we are now seeing a very different supply backdrop as compared to the dearth of new issuance during earlier months. Double-digit weekly calendars have returned and we think that issuers are seeking to lock in compelling borrowing terms before year end as bedrock projects require long-term financing. While we are not necessarily supportive of further Fed easing, we do think that rates have the potential to move lower with or without additional cuts. Slowing economic momentum with benign inflationary pressure and geopolitical events support this thesis and we think that issuers will continue to have attractive entry points throughout the fourth quarter (Q4).

We expect bond yields throughout the final quarter to move in response to trade developments, and without signs of a near-term deal, or at the very least easing tensions, we would expect there to be a weaker or less consistent appetite for risk assets. We believe that how munis perform relative to United States Treasury (UST) will be largely determined by technical factors and we will be particularly following fund flows as a reliable barometer of demand. We have just recently witnessed the 39th consecutive week of inflows and while there is evidence of erratic flows, we have yet to see a sustained slowing in the pace of inflows.