Muni Buyers Hope for January Effect as Bond Payments Approach
Investors are optimistic about municipal bonds as January brings a surge in bond payments, potentially boosting the market.
Municipal Bonds, Investors, January Effect, Barclays, Bloomberg, Debt, Federal Reserve
Bloomberg: The bond market wrapped up 2024 on a low note. But for state and local government debt, there’s a glimmer of hope for January.
Why? Well, municipal bonds usually perform well at the start of the year. This trend is so common that it’s called the January effect.
It all boils down to supply and demand. After the holiday season, government agencies often take their time selling new bonds. Meanwhile, investors are eager to reinvest their interest and principal payments.
This year is no different. Investors are looking at nearly $43 billion in muni-bond payments to roll into new debt. That’s a big number compared to the roughly $9 billion in securities expected to be sold in the next month.
Mikhail Foux, a muni strategist at Barclays, mentioned that with all this cash waiting to be invested and lower supply, investors will have to buy what’s available, which helps the market.
Of course, nothing is guaranteed. Municipal bonds, like other fixed-income securities, often follow the lead of Treasuries, which are influenced by speculation about the Federal Reserve’s interest rate moves.
However, tax-exempt debt has shown positive returns in eight of the last eleven Januaries, outperforming Treasuries in five of the last eight years, according to Bloomberg’s data. This supports the idea that supply and demand dynamics give a boost at the start of the year.
Foux also noted that the pace of new bond issuance should align with past slowdowns. Governments might hold off to see how the market reacts to upcoming economic data and the Fed’s next meeting, keeping some issuers on the sidelines.