This month may be time for buyers 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 observe report. Since 2018, state and local-government debt has gained in November, in response to 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 clarify why. Municipal issuance tends to be slower in November and buyers sometimes have extra cash available from coupon funds than obtainable debt to buy. Citigroup Inc. estimates that the money buyers obtain from bond funds will exceed the quantity of state and local-government bond gross sales by $3 billion in November.

“One of many fundamental explanation why we like being lengthy in November is as a result of provide begins trending down,” mentioned Mikhail Foux, head of municipal technique at Barclays Plc.

The quantity of debt anticipated to be bought over the subsequent 30 days is about $5.5 billion, or $3 billion lower than the 12-month common, in response to knowledge compiled by Bloomberg.

In fact, previous efficiency doesn’t assure future outcomes. The November profitable streak will likely be examined this yr if the economic system defies expectations and strengthens. As well as, tax-loss harvesting — the place buyers promote securities which have dropped in worth and reinvest in comparable, higher-yielding bonds — might 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 buyers begin including higher-rated, longer-maturity debt with coupons higher than 5% and callable in 10 years. 

Along with a downturn within the provide of bonds, Barclays initiatives the economic system will gradual to a 2% annual charge within the fourth quarter, from a sturdy 4.9%, easing stress on the Federal Reserve to boost charges and boosting bond costs. Curiosity-rate futures put the possibility of a charge 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 buyers are getting extra sanguine concerning the market, mentioned Foux.

“You might have geopolitical dangers, you could have considerations concerning the US economic system, and everyone’s speaking about recession in 2024,” he mentioned. “So if charges begin trending decrease and other people cease taking cash out of munis, I believe that’s all optimistic.”

Positioning for the brand new yr additionally tends to offer the market a lift within the last two months of the yr, Foux mentioned. Buyers purchase bonds to make the most of one other, extra outstanding, seasonal development, when a flood of principal and curiosity funds have a tendency to come back into the market at first of the yr.

This text was offered by Bloomberg Information.

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