Investors Dip Back Into Municipal Bonds

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

Municipal bond exchange-traded funds hit a record $1.8 billion in the week ending May 25, according to data from Refinitiv Lipper, quadrupling their weekly average for the week ending May 25. 2022, according to data from Refinitiv Lipper. Municipal bond mutual funds continue to lose investor cash, but outflows have fallen to their lowest level since March.

Prices rose as risky buyers returned, with municipal bonds back by 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 national and California premium yield funds, which were closed to new investors in last summer when prices skyrocketed.

Municipal bonds have returned minus 7.59% this year as of Friday, taking into account price changes and interest payments, according to Bloomberg index data from FactSet.,

Lasts a bit longer than other fixed-income investments. The Bloomberg US Aggregate Bonds Index – mostly US Treasuries, highly rated corporate bonds and mortgage-backed securities – has returned negative 8.47% this year so far. end of Friday.

“I think things are turning around. I don’t think it’s a blip,” said Matt Fabian, partner of Municipal Markets Analytics about the rally. “I think munis has become too cheap.”

One factor contributing to the rise in municipal bonds: They were in high demand in the early summer when a bunch of unpaid municipal debt was paid off and investors needed new tax-free sources of income. High net worth investors favor the roughly $4 trillion market in state and local government bonds because the interest they put in is generally exempt from federal and often state taxes.

Muni nut prices have fallen fairly steadily throughout the year as production increases in line with the Federal Reserve’s efforts to curb inflation. The prospect of newer, higher-yielding debt flowing into the market makes outstanding lower-yield debt less attractive to investors. Bond prices fall as yields increase.

Part of the downward pressure on muni prices comes from the steady flow of mutual investment, which has amounted to more than $40 billion this year, according to Refinitiv Lipper. Mutual funds control nearly $1 trillion in municipal bonds in circulation, according to Fed data. When those investors pulled out in unison, the fund managers had to find the money quickly.

The record amount of money pouring into exchange-traded funds, unlike mutual funds, which can be bought and sold at any time of the day, may reflect buying by younger investors, said Fabian. or more agile. Some of the cash could also come from mutual fund managers temporarily depositing investors’ money while they find bonds to buy, he said.

Many remain wary of announcing the end of the 2022 bond roadmap. Mikhail Foux, head of city strategy at Barclays PLC, wrote in a research note on Friday that economic uncertainty, interest rates, and economic uncertainty. Unsettled bond yields or a larger-than-expected bond issue can push prices down. “The market is not out of the woods yet.”

But city credit remains strong, with states, cities and school districts getting tax revenue from Covid-19 recovery and federal aid from pandemic rescue packages. That creates an incentive for investors to tiptoe back into the market as prices fall and rise.

One early participant, New York State resident Jonathan Kahn, said he bought his first municipal bond in two years on April 6. Before buying the bond, Kahn said, he often checks it out. publicly traded data posted by the City Securities Regulatory Commission, a self-regulatory organization, to see how much the dealer last paid for security. Unlike in the stock market, there is no publicly searchable daily price information for municipal bonds and many trades are infrequent. Debt is issued by about 35,000 borrowers ranging from states to rural hospital and sewer counties, according to Municipal Market Analysis.

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

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

When the market is going down, some investors try to make profits using a strategy known as buy down. WSJ’s Gunjan Banerji tells us why this approach is risky in today’s volatile market, even though it can be tempting. Illustration: Reshad Malekzai

Write to Heather Gillers at heather.gilers@wsj.com

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https://www.wsj.com/articles/investors-dip-back-into-municipal-bonds-11653949640?mod=rss_markets_main Investors Dip Back Into Municipal Bonds

Edmund DeMarche

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