Munis face ongoing geopolitical tensions, lighter supply

Munis are set to face ongoing geopolitical tensions ? which may soon reach a positive resolution ? amid lower, but still healthy, supply and lighter reinvestment.

"We are seeing a split between the macro and municipal credit behavior ? but broader macro fear sentiment seems to have reversed in the last week as the Iran-U.S. two-week ceasefire holds and potentially converts to a more permanent resolution, while municipal credit remains resilient at the median and not as directly affected at this time," said Mohammed Murad, head of municipal credit research at PT Asset Management.

However, the two-week ceasefire comes to an end Wednesday, though President Donald Trump said Thursday at an event in Las Vegas the war should be ending soon.

"We're crossing our fingers that we're in a negotiating phase and things will go well. But that could change, like in an hour or by tomorrow morning," said Ron Banaszek, co-head of public finance and lead underwriter at Blaylock Van.

A positive sign is that the Strait of Hormuz is now open to commercial vessels, which sent U.S. Treasuries rallying early Friday morning. In turn, muni yields are firmer, though the asset class was underperforming USTs.

"If the developments [Friday] morning are the seeds of a lasting agreement and the UST rate rally is sustained, resulting municipal inflows could mitigate expected challenging net-supply conditions," said J.P. Morgan strategists led by Peter DeGroot.

Issuance for next week is an estimated $11.92 billion, with $7.93 billion of negotiated deals on tap and $3.99 billion of competitives.

The New Jersey Health Care Facilities Financing Authority leads the negotiated calendar with $1.113 billion of RWJ Barnabas Health Obligated Group issue revenue and refunding bonds.

The competitive calendar is led by Massachusetts with $1.086 billion of GOs across four series.

Recent deals have been "well absorbed" despite ongoing geopolitical headlines, Murad said.

While the worst has likely passed for the time being, there may be some volatility, and supply should provide additional pressure, Barclays (BCS) strategists said, and they are not "overly concerned." This week's fund outflows ? which were tax-related ? are likely just a "one-off," they said.

There will be "relatively subdued reinvestment capital and continued elevated new issuance to drive onerous net supply conditions" over the next six weeks, with around $36 billion in net positive tax-exempt supply estimated from mid-April through May, J.P. Morgan strategists said.

"Save for a sustained rally in longer-dated UST rates, we think the market will need to cheapen to attract bank and insurance capital given the expected technical headwinds and current middling relative value conditions versus taxable fixed-income across most of the curve," they said.

The period through May "offers an attractive window to add exposure on market dips ahead of what should be a more supportive backdrop as Middle East tensions eventually ease and summer reinvestment bolsters demand," J.P. Morgan strategists said.