Summer notes before fall votes

The municipal markets typically experience a bit of a lull coming out of tax season before the busy summer months when municipalities issue bonds to fund projects. This is known as summer note season. This year was different, however. In May, issuers came to market stronger than expected. June and July likely also will be strong, with solid reinvestment cash flow as bonds mature and investors put that money back to work. As state and local governments ramp up 1-year note issuance, we could see overall municipal bond supply higher than it has been in the past few years. This increase would be welcome and can lead to better yielding opportunities in the primary and secondary market, which would further benefit the short end of the curve.

Why did the summer note season start early this year? We cannot ignore that all eyes are on the presidential election this year, with debates and campaigns already well underway. Issuers—and investors, for that matter—may be trying to get ahead of any potential disruptions. A larger supply of notes and bonds cheapened the municipal market considerably in May, presenting attractive buying opportunities for municipal money market and bond investors. We expect this to continue through June and July.

As the country votes on a new president, the Federal Open Market Committee (FOMC) will vote on when to introduce the first cut to the target range of the federal funds rate. Due to the uncertainty in timing of the decision, extending duration has been key on the short end of the municipal yield curve. As the FOMC is unlikely to raise rates again, we have seen more action in fixed-rate paper as opposed to variable-rate paper. The later the first cut is pushed back, the more value there is in extending duration now to capitalize on current attractive opportunities, particularly as issuance increases during the summer note season.