Investors are rushing back to the municipal-bond market after many spurned it over the past two years.

Capital poured back into muni-bond funds for the fifth-straight week with weekly inflows reaching a two-year high of $1.5 billion, according to LSEG Lipper Global Fund Flows data through Jan. 31. After dumping more than $120 billion over the last two years, skittish investors have been lured back to the market to get higher yields ahead of interest rate cuts from the US central bank. Parametric Portfolio Associates and Bank of America Corp. are among those forecasting positive flows for this year.

“There’s a lot of chasing returns,” said Brian Barney, a managing director at Parametric, who estimates 2024 inflows will reach $40 billion. Municipal rates “are still attractive and there is a little fear of missing out” as inflation subsides and before interest rates begin to fall, he added.

Sentiment turned around mid-November, according to Barney. Mom-and-pop holders — who collectively own the biggest share of the muni market — were among those who returned, snapping up state and local bonds in November and December. Losses in 2023 were erased, lifting returns of the Bloomberg Municipal Bond Index to 6.4% for the full year. 

While Federal Reserve Chair Jerome Powell said Wednesday a March interest rate cut was unlikely, bank economists including Bank of America and Goldman Sachs Group Inc. are now predicting the first cut will come in the second quarter. Investors who were scared off from fixed income markets, including muni bonds, by rate volatility amid the Federal Reserve’s aggressive rate hikes will have billions to invest.

“The recent market rally has probably left some people with FOMO and they want to lock in yields before they go down,” said Dora Lee, director of research at Belle Haven Investments.

Muni yields fell across the curve this week, dropping as much as 18 basis points since Monday morning. Despite a slight reversal on Friday, the rally is the biggest since December, according to data compiled by Bloomberg.

Investors are already pouring their January principal and interest payments into munis, Lee said. Plus, in the next 30 days, the amount available to reinvest is poised to outpace new muni supply by $17 billion, according to data compiled by Bloomberg.

January demand appeared strong, with buyer interest outweighing available new bonds, according to Eve Lando, portfolio manager at Thornburg Investment Management, which holds $6 billion in muni assets. Preliminary figures indicate last month’s inflows reached $4.25 billion, but she expects that could inch closer to the 10-year January average of $6 billion.

“Our expectation is that more money will be coming in as people view rates as here to stay, or go down as early as May,” Lando said.

This article was provided by Bloomberg News.