06/13/2018

Seasonality in the Municipal Bond Market

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Summertime typically finds municipal bond investors spending more time away from home – and potentially discovering that some of the individual municipal bonds they hold have converted to cash.

In the municipal bond market, summer has come to be known as the season for redemptions, since the months of June through August have a higher proportion of maturity dates and call dates than any other period of the year. During the upcoming summer season, the available supply of municipal bonds may decline significantly. This year, we expect to see maturing outstanding municipal bonds exceed new issue supply by roughly $80 billion; double the $40 billion average of the past few years.

This estimate is being based on forecasts indicating that more than $146 billion in outstanding bonds will either reach their final maturity date or be called on an optional call date. The difference between the volume of new issues and redemptions is often referred to as “net new issuance”. This year, net new issuance of negative $80 billion will leave investors challenged to replace their tax-exempt holdings and maintain their double-tax free income streams. This situation may be particularly problematic in states where the income tax rates are high, creating high demand for in-state municipal bonds.

For example, the State of Arizona is forecast to experience nearly $5 billion in redemptions, making it the 8th highest state in the nation for redemptions during this period – even though it normally ranks near the middle of the 50 states for overall issuance. (Source: Bloomberg)

The locally managed state municipal bond funds of the Aquila Group of Funds may provide a solution for municipal bond investors faced with the seasonal “reinvestment puzzle”, and perhaps more so in the current market environment of negative net issuance. Our seasoned portfolio managers know the in-state market landscape well; both the new issue and secondary trading markets. Their knowledge of the markets is a valuable resource as they work to identify value and provide shareholders with attractive double tax-free income.

Our state municipal bond funds are broadly diversified among investment grade bonds, various bond structures, maturities, and sectors in order to provide a high-quality portfolio of intermediate average maturity, and double tax-free income.

As you prepare for your summer getaway, consider one of the Aquila Group of Funds state municipal bond funds as an alternative for individual bonds that will be maturing, or called, in the coming months.

Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. The prospectus is available on this site, from your financial adviser and when you call 800-437-1020.