Munis Flat in March Amid Fed Rate Cut Speculation, $35B Issuance

Munis achieve 0.0% return in March amid Fed's cautious stance on rate cuts, signaling a complex outlook for the bond market.

By Max Weldon

4/3, 14:17 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF

Key Takeaway

  • Municipal bonds reported a 0.00% return in March, marking a rare occurrence and trailing behind corporate bonds and Treasuries.
  • Fed's indication of potential rate cuts "at some point this year" influences market anticipation but delays aggressive buying.
  • Elevated issuance of $35 billion in March was well received, yet influenced by seasonal tax selling and supply-demand dynamics.

Muni Market Holds Steady

March saw the municipal bond market delivering a rare performance, ending the month with a 0.00% return. This occurrence, only the second of its kind since 1980, highlights the unique challenges and resilience within the muni market. Despite trailing behind the positive performances of corporate bonds and Treasuries, the flat return of munis in such a volatile period underscores a cautious optimism among investors. The Federal Reserve's stance, as reiterated by Chair Jerome Powell, suggests a careful approach towards rate cuts, potentially beginning "at some point this year," which could significantly influence the muni market's direction.

Fed's Rate Cut Outlook

The Federal Reserve has maintained its projection for three interest-rate cuts in 2024, signaling a cautious yet forward-looking approach to monetary policy. Despite a unanimous decision to keep the federal funds rate steady at its highest since 2001, the Fed's communication hints at a readiness to adjust rates based on evolving economic data. This stance is crucial for the bond market, as it navigates through recent inflation upticks and anticipates the Fed's moves. The central bank's deliberation on slowing the pace of its balance-sheet reduction further adds a layer of complexity to the market's expectations.

Supply and Demand Dynamics

March witnessed a slightly elevated supply in the muni market, with about $35 billion in new issues. This influx, while well-received, slightly pressured the market. The potential for increased tax-exempt issuance, particularly to refinance old Build America Bonds, could invigorate the market, drawing in buyers and possibly enhancing performance. However, the demand side faced challenges from seasonal tax selling, affecting the overall market dynamics. The balance between robust supply and fluctuating demand will be pivotal in shaping the muni market's trajectory in the coming months.

Street Views

  • Pat Luby, CreditSights Inc. (Neutral on the municipal bond market):

    "If we see a continued surge of tax-exempt issuance, that will stimulate some interest, bring some buyers in and hopefully ramp up the animal spirits."

  • Dan Solender, Lord Abbett & Co. (Neutral on new issue supply in the municipal bond market):

    "Issuers also brought a slightly elevated new issue supply to the market, totaling about $35 billion in March. Those bonds were well received but caused the market to be down a little."

  • Sweta Singh, City Different Holdings (Neutral on muni curve and demand dynamics):

    "Even though supply was robust for the month, the demand side was affected by seasonal tax selling... we will have to really see how the supply-demand dynamic plays out."