The Hundred Billion Dollar Muni Summer

by: Patrick Luby


Muni bond redemptions peak every year in the summer months.

This year will follow that historical trend.

Muni redemptions in June, July, and August are forecast to total over $100 billion.

June has historically marked not only the end of school and the beginning of summer, but also the annual peak in municipal bond redemptions. According to data from Bloomberg, this year is expected to follow the same pattern, with $38.2 billion rolling off in June, $33.5 billion in July, and $29.9 billion in August. (The monthly average this year is just under $26 billion.) Forecast redemptions include maturing bonds as well as bonds that have been advance refunded or current refunded and are expected to be called away.

The opportunity to reinvest principal is one of the benefits of holding individual bonds, but with current rates and economic uncertainty, many advisors and their clients may be uncertain about how to reinvest - or even if they will want to reinvest in municipal bonds.

In addition to all of the factors that should normally be considered (issuer, credit rating, coupon rate, maturity date, call features, par amount, etc.), the decline in secondary market liquidity and the increase in political risk need to be managed more carefully than ever.

If you or your client have bonds coming due (maturing or pre-refunded) in the next several months, here are some thoughts to consider:

  • Changing asset allocation by using redeemed municipal bond proceeds to invest in another asset class will cause a shift in the overall portfolio risk profile, and should not be done unless called for by the investment plan.
  • Don't wait for the principal to be returned to you to consider what to do. Due to the volume of principal that will be seeking reinvestment, muni bond investors may find themselves competing with each other for a limited supply of appropriate bonds. Investors in high-tax jurisdictions with a preference for in-state double-exempt bonds may find their options even more severely reduced. Consider making provisions for reinvestment in advance of your bond's redemption date.
  • Pay attention now to the new issue calendar for appropriate issues that will settle after the maturity date of your maturing/refunded bond.
  • As an alternative to individual bonds, you may wish to consider using a municipal bond ETF to maintain asset class exposure while waiting for a suitable replacement security. (To learn more about doing this, read my recent article about using duration as a guide to selecting municipal bond ETFs, available here.)

Because of the heavy volume of expected redemptions, muni bond investors should plan their reinvestment strategy in advance of when their bonds mature or get redeemed.

The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy or appropriateness is not guaranteed. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. Past performance is interesting but is not a guarantee of future results. Investments in bonds, and fixed income funds or ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.