Investors dive back into municipal bonds

Investors are returning to the municipal bond market, eager to take advantage of bargains.

Municipal bond exchange-traded funds took in a record $1.8 billion for the week ended May 25, quadruple their weekly average for 2022, according to data from Refinitiv Lipper. Municipal bond mutual funds continued to lose investor money, but outflows fell to their lowest level since March.

Prices rose as buyers ventured in, with municipal bonds returning 2.9% from May 18 to Thursday, according to Bloomberg index data. Nuveen LLC, one of the largest municipal bond managers, said it plans this week to reopen its national and California high-yield funds, which closed to new investors last summer as prices rose in arrow.

Municipal bonds returned minus 7.59% this year on Friday, counting price changes and interest payments, according to data from FactSet’s Bloomberg Index.,

slightly ahead of other fixed income investments. The Bloomberg US Aggregate Bond Index – mostly US Treasuries, investment grade corporate bonds and mortgage-backed securities – has returned minus 8.47% this year through Friday.

“I think things revolve around. I don’t think it’s a blow,” Municipal Market Analytics partner Matt Fabian said of the rally. “I think the munis had become too cheap.”

A contributing factor to the rise in municipal bonds: they are in high demand in early summer, when some of the outstanding municipal debt is paid off and investors need new sources of tax-free income. High net worth investors favor the roughly $4 trillion market for state and local government bonds because the interest they earn is generally exempt from federal and often state taxes.

Munitions prices fell fairly steadily throughout the year as yields rose in response to the Federal Reserve’s efforts to contain inflation. The prospect of new, higher-yielding debt securities entering the market has resulted in a loss of attractiveness for investors. Bond prices fall as yields rise.

Some of the downward pressure on muni prices comes from steady mutual fund outflows, which amount to more than $40 billion so far this year, according to Refinitiv Lipper. Mutual funds control nearly $1 trillion in municipal bonds outstanding, according to Fed data. When these investors pull their money in unison, fund managers need to find the money fast.

Record inflows into exchange-traded funds, which unlike mutual funds can be bought and sold at any time of day, likely reflect purchases by younger or more nimble investors, Fabian said. Some of the money could also come from mutual fund managers temporarily parking investors’ money while they look for bonds to buy, he said.

Many are reluctant to declare the end of the 2022 bond rout. Economic turbulence, volatile bond rates or more bond issuance than expected could drive prices down, Mikhail Foux, head of municipal strategy at Barclays PLC, in a research report. “The market is not out of the woods yet.”

But municipal credit has remained strong, with states, cities and school districts benefiting from tax revenue from the Covid-19 recovery and federal aid from pandemic bailouts. This encourages investors to tiptoe back into the market as prices fall, and they do so more and more.

One of the first participants was New York state resident Jonathan Kahn, who said he bought his first municipal bond in two years on April 6. Before buying a bond, Kahn said, he typically checks public trading data released by the Municipal Securities Regulatory Board, a self-regulatory body, to find out how much a broker last paid for the bond. title. Unlike the stock market, there is no publicly viewable daily price information for municipal bonds, and many rarely trade. Debt is issued by about 35,000 different borrowers ranging from states to sewer districts and rural hospitals, according to Municipal Market Analytics.

Mr Kahn said that before April, the last time he had found a bargain was in March 2020, when the onset of the Covid-19 pandemic caused market panic and prices for muni exploded. In the past two months, Kahn said he made 15 purchases on the muni market.

“It’s an open question how long yields will continue to rise and prices will remain attractive,” he said.

When markets turn lower, some investors try to make a profit using a strategy known as buying the dip. The WSJ’s Gunjan Banerji explains why this approach is risky in today’s volatile market, however tempting it may be. Illustration: Reshad Malekzai

Write to Heather Gillers at [email protected]

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Melissa C. Keyes