BofA, Barclays strategists split on muni bond rally odds

investmentnews.com:

Two of the biggest banks in the $4 trillion municipal bond market are conflicted over whether the summer will bring a rally for state or local government debt or instead leave investors disappointed.

In research notes published within minutes of each other Friday morning, strategists at Barclays Plc and Bank of America Corp. diverged on their outlooks for the next several weeks. BofA portrayed a sunny view — calling for an “easy” rally with credit spreads tightening, while Barclays provided a more cautious outlook. 

“We expect the muni market rally during the summer months to be gradual and methodical as the economy is entering a goldilocks zone and macro market volatilities come down steadily,” the BofA group led by Yingchen Li and Ian Rogow wrote in a note to clients.

Meanwhile, Mikhail Foux and Clare Pickering at Barclays took a more somber view, observing that an expected increase in new bond sales may pressure returns. The supply of municipal bond deals has surged in 2024 with more than $156 billion coming to market — a 33% increase from the same period a year ago.

“Even though tactical municipal investors might try to take advantage of the current market’s strength, we remain cautious as summer might be relatively difficult for munis,” the strategists wrote in a note entitled Summertime Sadness, seemingly after the 2012 hit song by pop-star Lana Del Ray.

The contrasting forecasts illustrate just how difficult it is to predict the direction of the municipal bond market. The performance of state and local government debt is often tied to how great the difference is between new issue supply and the amount of money flowing back to investors through coupon and maturity payments.

Typically — in the summer — that supply