Supply falls, munis close 1H in the black

The muni market will see a lighter new-issue calendar this week, amid July 1 reinvestment, as the asset class is set to close the first half of the year in the black.

The market has begun to feel "somewhat heavy," although last week's rally in U.S. Treasuries has provided meaningful support, said Barclays (BCS) strategists.

This week, the first three days will "rock and roll," as Thursday has an early close ahead of the Independence Day holiday on Friday, said Tim McGregor, managing partner at Riverbend Capital Advisors.

Munis should perform well given the limited supply and the arrival of July reinvestment capital, said J.P. Morgan strategists.

Issuance falls to an estimated $5.055 billion this week, lighter due to the holiday-shortened week, and it's possible some deals will come on Monday.

There are $3.912 billion of negotiated deals on tap and $1.142 billion of competitives, according to TM3.

The Black Belt Energy Gas District leads the negotiated calendar with $920 million of gas project revenue bonds.

The competitive calendar is led by Revere, Washington, with $175.63 million of general obligation bond anticipation notes.

"While municipal market technicals and fund flows' momentum should drive a positive tone, geopolitical risk factors persist and the market will digest a number of tier one economic prints, including Thursday's June employment report," said J.P. Morgan strategists.

Currently, there's a "pretty good balance" in the muni market, Riverbend Capital's McGregor said.

"A lot of supply [year-to-date], decent reinvestment, still some real nice pockets of value on the curve, and parts of the curve that seemingly have no value, but still, still get well bid, so that makes for a good market," he said.

There have been solid inflows into mutual funds and exchange-traded fund creations, along with strong reinvestment, said Kevin McGuigan, director of Municipal Market Analytics.

That demand has been supportive and will remain so in July and August, he said.

Munis often see a "seasonal lift" during the summer months. The setup looks "constructive" for summer technicals this year, but it is not guaranteed, said Lawrence Gillum, chief fixed income strategist at LPL Financial (LPLA).

Supply year-to-date is running at a "high pace," which could limit "how pronounced the summer lull becomes compared with lighter years," he said.

Still, reinvestment flows should provide meaningful support, according to Gillum.

"Attractive starting yields and a relatively steep muni curve add another layer of appeal. If broader rates stay range-bound or ease modestly, the seasonal bid could help drive positive performance through the summer and into fall," he said.

Solid fundamentals, income levels approaching multi-year highs and recurring technical support make munis worth looking at as summer unfolds, Gillum said.