Supply remains robust as technicals become challenged

While tax-exempt ratios have cheapened somewhat, September typically has been a "challenging month" for munis, though last year was an exception, said Barclays strategists led by Mikhail Foux. Supply remains elevated this week as the technical environment becomes more challenging. Processing Content Issuance is estimated at $17 billion this week, with five states issuing over $1 billion in bonds: Alabama, Texas, New York, Minnesota, and Massachusetts. For a change, Alabama's big supply is not a prepay deal but financing for a bridge in Mobile, CreditSights strategists said. The Alabama Toll Road, Bridge and Tunnel Authority leads the negotiated calendar with $3.71 billion of toll revenue bonds and anticipation notes and project revenue bonds, to be sold across four series, followed by New York City with $1.81 billion of general obligation bonds. The competitive calendar is led by Minnesota with $1.02 billion of GOs to be sold across five series. The muni market could struggle this week as supply is double last year's volume in consecutive weeks, amid a holiday-shortened week and after last Friday's "bear-flattening" on the stronger-than-expected jobs report, said J.P. Morgan strategists, led by Peter DeGroot. "With yields at year-to-date highs, tax-exempt buyer[s] can find value in the primary amidst the deluge of supply as well as in the secondary given active tax-loss trading," they said. While tax-exempt ratios have cheapened somewhat, September typically has been a "challenging month" for munis, though last year was an exception, said Barclays strategists led by Mikhail Foux. "Even then, performance was driven largely by expectations of a Fed[eral Reserve] pivot and unusually attractive valuations at end-August 2025," they said. Valuations are currently less "compelling," and technical conditions are more challenging, Barclays strategists said. Redemptions are expected to decline this month and next, while the new-issue calendar keeps growing, they said. Fund flows could moderate from recent levels if last week was any indication of things to come, Barclays strategists said. "Taken together, these factors suggest a less supportive technical backdrop, which could make it difficult for municipals to outperform over the near term despite our constructive longer-term outlook," they said. Investors should consider using any "near-term weakness" as an opportunity to begin dollar-cost averaging, said Daryl Clements, a municipal portfolio manager at AllianceBernstein. "While technical conditions may be more challenging in the fall, with sizable net supply expected in September and October, that potential volatility can create more attractive entry points rather than a reason to remain on the sidelines," he said. Current valuations offer a compelling starting point: the Bloomberg Municipal Bond Index yield has risen to 4.07%, meaning a taxable-equivalent yield of 6.88%, a level last seen in July 2025, Clements said. Following that prior peak, yields later fell, showing the risk of "waiting too long for a perfect entry point," he said. Additionally, the yield on the Bloomberg Corporate High Yield Index is 7.37%, 49 basis points above the Bloomberg Municipal Bond Index's TEY, with much more credit risk, Clements said. "Dollar-cost averaging allows investors to participate in today's elevated income levels while preserving flexibility," he said. "With the average price of the Index slightly below par, munis have become more attractively valued on both an absolute and relative basis, particularly after cheapening materially versus U.S. Treasuries since June 30." There have been times in the past when munis become relatively cheap and absolute yields too high, only for munis to later rally. "Nothing stays cheap forever," Clements said.