After some wildness, the municipal bond market has posted strong overall returns in last few weeks. Investment grade municipal bond returns are positive for 2020.

Technicals are balanced, considering above-average supply and continued inflows to muni mutual funds. The markets appear to be at least stable, if not rising, on higher comfort levels with potential U.S. state budget shortfalls. The states are demonstrating that they have vast flexibility to address these issues.

When coupled with present and possible future federal aid, municipal bond investors are optimistic about the ability of state and local entities to withstand the pandemic downturn.

Last week AAA municipal yields moved modestly higher in intermediate and long maturities. The Bloomberg Barclays Municipal Index was unchanged, while the High Yield Muni Index returned 2.12%.

Robust Fund Flows: For the fourth consecutive week, municipal mutual funds reported inflows ($1.2 billion). Long-term funds added $349 million; high yield funds had a second positive week, at $195 million; and intermediate funds had inflows of $125 million.

Still, challenges persist, as year-to-date municipal fund net outflows now total $16.6 billion.

Strong Supply: The muni market recorded $10.4 billion of new issue volume last week, up a healthy 21% from the prior week. Year-to-date issuance – $162 billion – is 24% above 2019’s pace. This is driven primarily by taxable supply exceeding last year’s levels by over three times.

Another $10 billion or so is expected to be issued this week, led by $3.5 billion of DASNY Revenue Anticipation Notes and an $800 million taxable University of Michigan transaction.