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(Bloomberg) — This month is likely to be time for traders to stuff their portfolios with municipal bonds.
It’s not simply that tax-equivalent yields on munis are hovering round 10% for rich residents in excessive tax states like New York and New Jersey. It’s the monitor document. Since 2018, state and local-government debt has gained in November, in line with the Bloomberg Municipal Bond Index. And over the past 10 years the month has posted optimistic returns seven occasions.
Seasonal provide and demand dynamics assist to elucidate why. Municipal issuance tends to be slower in November and traders sometimes have additional cash available from coupon funds than out there debt to buy. Citigroup Inc. estimates that the money traders obtain from bond funds will exceed the amount of state and local-government bond gross sales by $3 billion in November.
“One of many important the reason why we like being lengthy in November is as a result of provide begins trending down,” stated Mikhail Foux, head of municipal technique at Barclays Plc.
The quantity of debt anticipated to be bought over the following 30 days is about $5.5 billion, or $3 billion lower than the 12-month common, in line with knowledge compiled by Bloomberg.
In fact, previous efficiency doesn’t assure future outcomes. The November successful streak will likely be examined this yr if the financial system defies expectations and strengthens. As well as, tax-loss harvesting — the place traders promote securities which have dropped in worth and reinvest in comparable, higher-yielding bonds — may weigh available on the market.
Barclays’ Name
Nonetheless, Barclays likes the muni market’s prospects for this month and the remainder of the yr. The agency recommends traders begin including higher-rated, longer-maturity debt with coupons larger than 5% and callable in 10 years.
Along with a downturn within the provide of bonds, Barclays tasks the financial system will sluggish to a 2% annual fee within the fourth quarter, from a strong 4.9%, easing strain on the Federal Reserve to boost charges and boosting bond costs. Curiosity-rate futures put the prospect of a fee improve Wednesday afternoon close to zero and only a one-in-five likelihood of a hike in December.
Muni mutual fund outflows are additionally comparatively low, tallying about $900 million final week, indicating traders are getting extra sanguine concerning the market, stated Foux.
“You will have geopolitical dangers, you might have considerations concerning the US financial system, and all people’s speaking about recession in 2024,” he stated. “So if charges begin trending decrease and folks cease taking cash out of munis, I feel that’s all optimistic.”
Positioning for the brand new yr additionally tends to provide the market a lift within the closing two months of the yr, Foux stated. Traders purchase bonds to benefit from one other, extra outstanding, seasonal pattern, when a flood of principal and curiosity funds have a tendency to return into the market at the beginning of the yr.
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