A surge in borrowing pushed municipal deal flow to the fastest start to the year on record after states and cities seized on more stable interest rates to flood the market.

Municipalities sold $236 billion of debt since January, the highest for the first half ever, according to data compiled by Bloomberg which dates back decades. The surge represents roughly 38% more than the same period last year.

Chris Brigati, director of strategic planning at SWBC, pointed to three drivers of supply in the first half: pent-up demand from lighter issuance last year, a bevy of infrastructure borrowing needs as stimulus funding wanes, and a rush by issuers to come to market before the US presidential election in November.

The growth has led market strategists to increase their supply forecasts. JPMorgan Chase & Co. raised its full-year estimate by 15% to $460 billion in a research note published Friday. Municipal analysts at Barclays Plc lifted their 2024 supply expectations to $450 billion from $430 billion late last month.

The supply surge has been a welcome surprise in the market, which digested the bonds and highlighted the strength of demand among buyers, said Dora Lee, director of research for Belle Haven Investments.

“Issuers seemed to have gotten tired of waiting for interest rates to come down, gritted their teeth and issued anyway,” she said.

A broad index of municipal bonds has declined about 0.4% this year, more modest declines than those in Treasuries and corporates, according to data compiled by Bloomberg. The riskiest corner of state and local government debt, however, has been a bright spot, with high-yield munis gaining 4.14%.

The strategists at JPMorgan said that despite the supply increase, they “anticipate market outperformance” over the near term.

“We believe that the more-supportive liquidity and lesser supply will set the market up to perform well through year-end, particularly if the Fed eases in November and a scenario where assets cheapen in the fall,” the group said.

  - Bloomberg