Municipal Markets Continue To Feel The Pressure This Year, Yet Fundamentals Remain Stable
The municipal bond market has not been immune to bouts of volatility hitting the markets this year, but there are still pockets of opportunity, according to Franklin Templeton Fixed Income’s Director of Municipal Bonds, Ben Barber. He points to improving technical conditions, stable fundamentals and inexpensive valuations that make the asset class look compelling.
Historic levels of volatility in the municipal (muni) bond market so far this year has caused investor concerns over market conditions. A more hawkish sentiment from the US Federal Reserve has led to higher yields across fixed income sectors, causing many retail investors to reduce their muni holdings in search of shelter from anticipated higher volatility.
As in previous updates, we wanted to provide an outlook and review on three major components of the muni markets that continue to create opportunities for active managers within the muni market, despite the challenging environment.
Technical conditions in the market have improved for tax-exempt investors as the year has progressed, yet outflows of funds from the sector persist. Primary issuance has slowed through the summer. Reinvestment of dividends and refundings have caused increased demand for new bond issuance. The market typically witnesses additional new supply in September and October, which can provide investors with new opportunities to put cash balances to work.
Total net flows of funds were negative in the month of August, driven by a selloff from exchange traded funds (ETFs) toward the end of the period.1 Additionally, mutual funds saw outflows during the month, although to a lesser extent.
- Outflows have been concentrated in longer-duration, investment-grade products. In contrast, there have been positive monthly net flows into intermediate investment-grade products.2
As of the end of August 2022, year-to-date (YTD) total issuance was down 14% relative to 2021. This is primarily due to a 42% decline in taxable muni issuance, as higher interest rates have made taxable refundings uneconomical for most issuers.3 In contrast, tax-exempt issuance is only lower by 5% YTD.4