Payden California Municipal Social Impact Fund Adviser Class

The California municipal bond market posted gains in May, building on April’s recovery and extending the market’s rebound from the sharp first-quarter selloff. The Bloomberg California Intermediate Municipal Bond Index returned approximately +0.25% during the month, bringing the year-to-date return to approximately +0.28% through month-end. The dominant macroeconomic theme shifted over the course of the month as U.S.-Iran ceasefire negotiations progressed, reducing some of the geopolitical risk premiums that had weighed on rates in prior months. Crude oil prices pulled back from April highs, alleviating inflationary pressure and allowing U.S. Treasury yields to rally modestly across the intermediate and long portions of the curve.

Municipal bonds continued to benefit from strong investor demand in May. Investors had approximately $31 billion to reinvest from maturing bonds, about 25% more than in April, providing significant support for the market. Demand was particularly strong for medium- and longer-term municipal bonds, with valuation measures relative to U.S. Treasuries ending the month near 60% for 5-year bonds, 65% for 10-year bonds, and 85% for 30-year bonds. Municipal bond mutual funds and ETFs continued to attract new money throughout the month, putting year-to-date inflows on pace for one of the three strongest years on record. Meanwhile, new bond issuance averaged approximately $11-$13 billion per week, and investor demand was strong enough to absorb the new supply. The financial health of state and local government issuers remained broadly stable across sectors.

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.