It’s that time of year again, the season when a stream of principal and interest is returned to municipal bond investors and issuance slows to a trickle.

A surge of redemptions, calls and interest payments isn’t unusual during late spring and summer, nor is the potential imbalance between supply and demand (“Summer Forecast: A Muni Redemption Flood, Supply Drought”)

But it does present a question as to where investors might deploy their incoming cash.

Summertime supply lag

From May through August, analysts estimate $231 billion of municipal bonds will mature and be called, and interest payments will be made. New issuance, on the other hand, is expected to be about $160 billion during the same period.

In May alone, the supply deficit – cash available for reinvestment vs. new issuance – could reach about $16 billion, according to Raymond James. In June, it’s estimated to be $6 billion.

If new issue supply continues at a pace similar to the start of the year, supply from June through August will be about $135 billion, less than the $153 billion of principal and interested expected to be returned to investors in that time, Raymond James reported.

Attractive taxable-equivalent yields

For almost two years, money-market funds have been a siren song for many investors choosing to park their cash. Elevated yields have attracted more than $1.2 billion into these funds since October 2022.

We wonder, however, whether investors sidelining their cash have considered what happens when yields on money-market funds ease, as they invariably will.

Speak to a Muni Pro

You've enjoyed reading our insights, now speak with the pros to find the right bonds for you.

Of course, we don’t know when that will happen, but we’re certain there won’t be a clear, discernible signal to investors that’s it’s precisely the right time shift their cash.

What’s clear, though, is that tax-free bond yields are at years-long highs. Consider, for example, that the taxable equivalent yield on 30-year, A-rated municipal bonds for investors paying a 40.8% tax rate was recently a whopping 7.23%.

Plan now

With a supply/demand imbalance, we expect municipal yields to ease and municipal-to-Treasury yield ratios and spreads to narrow.

For investors with cash to invest, preparing for what’s next will help ensure an uninterrupted flow of tax-free income.

We know a mass of redemptions and interest payments is on the horizon. Fortunately, for those who plan, now is a particularly advantageous time to put their cash to work.