US manufacturing activity shrank in September for the sixth straight month, reflecting weak orders and declining employment. This is one of the primary reasons we saw yields fall yesterday, along with the Israel conflict raging. I suspect these numbers (manufacturing) will continue to move down as the economy slows, creating opportunities in paper currently—we would suggest buying the dip.
In the past, October has produced negative returns for municipal bonds, and it would not be unreasonable for investors to have low expectations as September ends. However, a few things could disrupt this theory, and the biggest wildcard for MUNIs this month will be the upcoming elections. We will see tax policy spoken about, which will shape the future of MUNIs as we move into 2025; no one is expecting the tax expedition to be removed; however, monitoring the overall health of states and larger municipalities will be important should tax law start to change, or government funding differs from what it is now.
Morgan Stanley estimated that the implementation of a Republican tariff hike proposal would drive up inflation and hit US economic growth, which would undercut employment. I am on the fence about this. Should tariffs be imposed, we will see additional inbound revenue over time, which should help offset any inflationary numbers. Regardless of who gets into office, I would bet we will see additional tariffs for various reasons; however, should Trump win, I would firmly believe we would see tariffs imposed immediately.
Supply remains strong in our markets. Two issues on 10/01, with a total of 637MM, will be priced. Interestingly, the markets have absorbed these issues well, and yields have held. I suspect we will continue to see issuance heavy due to rates coming down, but I also think yields will stay firm through October (which is historically a tough month). $16B this week and will hold – I would recommend buying the dip here.
The Bottom Line:
I believe we will continue to see heavy issuance throughout October and perhaps into November. We have seen a 50bps move down and not much movement (expect yesterday, 10/1) in pricing for FI securities. I suspect this is due to the enormous supply hitting the markets. With all this said, considering the supply issuance, the market has absorbed this paper in stride. Remember, there continues to be tons of cash sitting in MM’s looking for a home. I would encourage you to buy the dip as stated above, I suspect you will be rewarded as we move into 2025.
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David Loesch
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