The California municipal bond market delivered positive returns in June, extending the recovery that began in April and building on May's modest gains. The Bloomberg California Intermediate Municipal Bond Index returned approximately 0.54% during June, bringing the year-to-date return to approximately 0.82%. Performance was supported by continued fund inflows and generally favorable supply-and-demand conditions.
U.S. Treasury yields were mixed during the month. Shorter-term U.S. Treasury yields moved higher after the Federal Reserve (Fed) took a more hawkish stance at Chair Warsh's first Federal Open Market Committee Meeting (FOMC) meeting, while longer-term U.S. Treasury yields declined modestly on concerns about economic growth. The 10-year U.S. Treasury yield ended the month near 4.46% and the 30-year ended near 4.90%. Municipal bonds broadly outperformed taxable bonds, reflecting persistent demand and the asset class's relative insulation from near-term Fed policy shifts.
The summer reinvestment window continues to provide meaningful support. Reinvestment demand is projected to surge approximately 40% year over year through the third quarter, with roughly $45 billion to $50 billion in monthly reinvestment capital expected to meet or exceed new issuance in July and August. Weekly new supply of $11 billion to $13 billion was consistently well absorbed during June, with new issues largely oversubscribed. Year-to-date gross issuance remains on pace to approach a record of nearly $600 billion, though net supply remains manageable.
Fund flows into municipal mutual funds and exchange-traded funds (ETFs) remained positive throughout the month, with longer-duration municipal funds gathering over $21 billion in year-to-date inflows as investors continued to lock in elevated tax-exempt yields. Muni/Treasury ratios stayed range-bound, with intermediate ratios remaining below long-term averages, creating a modest headwind for relative value, but not deterring continued demand.
