Carlson added that while the start of the year was difficult, he is optimistic that municipal bonds will make a full recovery. In fact, some think that signs of that turnaround are already manifesting themselves.
In recent weeks, the industry has seen those record-breaking outflows greatly slow while the level of inflows has remained constant. The Bloomberg Municipal Bond Index was down by more than 10.6% on May 18 and by June 8, it had fallen only 7.6%.
Despite the volatility, municipal securities continue to offer a safe environment for those investors who are looking to get back into bonds, but do not want to take a lot of risk, according to Carney. “When people are looking to put their money back to work in a high-quality fixed income product over an overly risky option, municipal bonds fit that bill,” he said.
Several factors give municipal bond managers confidence in this turnaround. First, the Federal Reserve has made its intentions regarding raising interest rates over its next few meetings clear, giving the market some clarity, Stienstra said.
Another area of uncertainty pertains to tax season, as some investors cashed out of their municipal bonds to pay for their taxes. However, much like the Fed’s decision, the tax concerns are in the past.
A major shift in the municipal market traditionally takes place over the next few months. It is a time many refer to as a net negative period when municipal bonds and coupons start to mature and investors sell them off, according to Carney.
Subsequently, investors will look to reinvest into these offerings and while the demand will be high, states and local municipalities do not tend to issue as many bonds, which increases demand and then drives the prices up. Payments outpace new brands during this period.
This will result in a more positive performance of municipal bonds which will eventually lead to strong inflows. “Performance will turn first,” Carney said. “Then on a lag, flows will increase.”