(Bloomberg) -- The muni market notched an unusually strong month in February — but the asset class is facing headwinds as new bond sales build.
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The state- and local-government debt market gained about 1% last month, marking the best February for performance since 2020 and the second-largest gain for the period in the past decade, according to data compiled by Bloomberg. On average, over the last 10 years, the muni market has posted a monthly drop of 0.27% during the second month of the year.
Jeffery Timlin, managing partner at Sage Advisory Services, said February’s returns were driven by the gain in US Treasuries last month. Uncertainty over the impacts of rapid federal policy changes has led investors to buy higher-quality assets, he said.
“You’re seeing a kind of a risk-off trade,” said Timlin. “Obviously multiple factors can be attributed to that dynamic, whether that’s people’s concerns — or lack thereof — of inflation, tariff concerns, economic slowdown concerns.”
Read More from Bloomberg Intelligence: Munis February Returns Get Treasuries Boost to Silence Critics
That flight to quality helped state and local debt perform well despite a surge in supply. Municipal borrowers sold $38.8 billion of long-term bonds in February, the most for that month since 2020 when rates were close to 1%, according to data compiled by Bloomberg. So far this year, new issuance have jumped about 25% compared to the same period in 2024, the data shows.
Still, JPMorgan Chase & Co. analysts led by Peter DeGroot said they see a “more challenging” March and April as supply is expected to pick up compared to bonds being taken out of the market. Municipals underperformed the rally in US Treasuries last month — as the tax-exempt debt tend to lag such moves.
Strategists at Barclays Plc led by Mikhail Foux said that March may pose challenges. Some investors look to sell their holdings to pay their tax bills during tax-filing season, they wrote in a research note published Friday.
“This year, technicals might be more challenging, including low redemptions, heavy supply, continued rate volatility and customary tax-related selling,” Foux wrote. “We would not want to be overly aggressive.”
However, investors may look to use any weakness as a buying opportunity if municipals cheapen further. “Looking ahead, March could present a compelling entry point for investors as market technicals may be less favorable,” Lind Capital Partners wrote in an emailed report on Monday.