In our view, the macroeconomic backdrop has become more constructive for fixed-income broadly. Federal Reserve Chair Kevin Warsh was confirmed by the Senate in mid-May, and the Federal Open Market Committee (FOMC) held rates unchanged, as was widely expected. Ongoing U.S.–Iran ceasefire framework discussions could provide an additional tailwind if geopolitical risk premiums continue to ease, though the situation remains fluid and elevated energy prices could re-emerge if talks stall.
Municipal bonds typically benefit from favorable seasonal demand during the summer. This year, however, that tailwind may be partially offset by an expected $12 billion of new issuance in June, approximately 1.4 times the historical average. Even so, the balance between supply and demand has historically supported municipal bond performance during the June-July period. While current net supply remains in line with April levels, the first week of June is expected to be the heaviest issuance week of the year. Annual issuance remains on pace to reach a record near $600 billion for the year, although weekly issuance has moderated from the elevated levels seen in March and April.
Valuations are approaching rich levels compared to 5-year averages, particularly for bonds with maturities of 10 years and shorter. Maturities 15- to 20-years capture the steepest part of the yield curve, while 20- to 30-year bonds appear closer to fair value. We remain selective in healthcare and higher education issuers given ongoing One Big Beautiful Bill Act (OBBBA)-related Medicaid and endowment policy headwinds. Looking ahead to June and the rest of the second quarter, we remain positive on the California municipal bond market.
