(Bloomberg) — The bond market ended 2024 on a down note. But when it comes to state and local government debt, at least, investors have one reason to think January will be better.
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That’s because municipal bonds tend to do well at the start of the year — predictably enough that it’s become known as the January effect.
At root is simple supply and demand: after the year-end holidays, government agencies tend to get a slow start on selling new bonds just as investors have interest and principal payments that they typically seek to invest.
It is happening again this year with investors poised to have nearly $43 billion in muni-bond payments to potentially roll into new debt, according to data compiled by Bloomberg Intelligence, far eclipsing the roughly $9 billion of securities that are slated to be sold over the next 30 days.
“You’re sitting on this pile of cash that you need to invest and since supply is lower than expected, you’re forced to buy what’s out there and that effectively helps the market,” Mikhail Foux, a muni strategist at Barclays Plc, said in an interview.
The phenomenon is no sure thing, of course. Municipal bonds — like other fixed-income securities — largely take their cue from Treasuries, which in turn are driven by speculation about where the Federal Reserve will push interest rates.
But tax-exempt debt has delivered positive returns in eight of the last 11 Januaries, compared with seven for Treasuries. And the muni returns were better that federal government debt in five of the last eight, according to Bloomberg’s indexes, lending some credence to the theory that the supply-and-demand dynamics are providing a boost at the start of the year.
Foux said that the pace of issuance should comport with past slowdowns, with governments likely waiting to see how the market fares as economic data rolls out and the Fed holds its next meeting. That, he and fellow Barclays analysts wrote in a note to clients, should “keep some issuers on the sidelines.”
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