This month is likely to be a superb 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 observe document. Since 2018, state and local-government debt has gained in November, in line with the Bloomberg Municipal Bond Index. And during the last 10 years the month has posted constructive returns seven instances.

Seasonal provide and demand dynamics assist to elucidate why. Municipal issuance tends to be slower in November and traders sometimes have extra cash available from coupon funds than accessible 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 primary the explanation 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 probably be examined this 12 months if the economic system defies expectations and strengthens. As well as, tax-loss harvesting — the place traders promote securities which have dropped in worth and reinvest in related, higher-yielding bonds — might weigh in the marketplace.

Barclays’ Name

Nonetheless, Barclays likes the muni market’s prospects for this month and the remainder of the 12 months. 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 economic system will sluggish to a 2% annual price 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 prospect of a price enhance 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 have got geopolitical dangers, you might have considerations concerning the US economic system, and all people’s speaking about recession in 2024,” he stated. “So if charges begin trending decrease and other people cease taking cash out of munis, I believe that’s all constructive.”

Positioning for the brand new 12 months additionally tends to present the market a lift within the last two months of the 12 months, Foux stated. 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 the beginning of the 12 months.

This text was offered by Bloomberg Information.