Municipal bonds have witnessed a record number of outflows this year, but many experts in the market say there is little reason to be alarmed. Some expect a significant comeback later this summer as interest rates stabilize. Others, meanwhile, are interested but not ready yet to invest in the market.
This tax-free sector have enjoyed tremendous popularity with individual investors in the past but this year has seen significant disruption in the face of rising interest rates. Through an 18-week stretch the market suffered record-setting outflows of more than $68 billion. Coupled with a decline in the amount of inflows, some are wondering if municipal bonds will continue to be the reliable investment many income-oriented investors have considered them to be.
Few areas of the fixed-income market, including munis, have been spared in 2022, which some have estimated to be the worst year for bonds so far since 1842. “It’s been a horrible and painful year for all [fixed-income] managers,” said Catherine Stienstra, head of municipal investments at Columbia Threadneedle.
While selloffs are fairly common for these offerings around this time of year, Stienstra said the industry has never experienced such a sharp downdraft before. There are several factors that led to this including rising interest rates initiated by the Federal Reserve, putting pressure on all fixed-rate products across the board.
Sean Carney, head of municipal strategy at BlackRock, is reasonably optimistic. He believes there is no reason to expect that the municipal securities won't remain a viable investment.
In the short-term, many states are flush with cash thanks to stimulus checks from the federal government. Beyond that Carney said most have been fiscally responsible by managing their budgets and controlling spending. With this year being an election year, most will not be tempted to make many dramatic changes to their states. “The worst of these moves is behind us now,” Carney said.
Stienstra agreed saying that even though the influx of federal cash is only a temporary adjustment, the positions of the local and state governments continue to show positive signs for the future and the health of the municipal bonds. “Across the local and state credit markets, we feel very good about it,” she said.
In the face of this adversity, some advisors have not lost faith in the offerings and continue to use them in client portfolios. “We’re using municipal bonds a lot and leaning into them even more,” said Chad Carlson, president and chief investment officer at Balasa Dinverno Foltz in Itasca, Ill.