Traders revisit muni bonds amid greater yields and powerful credit score

It has been a troublesome 12 months for municipal bonds, with buyers cashing out amid rising interest rates. Nonetheless, greater yields and powerful credit score could also be sparking a shift, consultants say.

Whereas buyers piled a record-breaking $96.8 billion of internet cash into U.S. muni mutual and exchange-traded funds in 2021, weekly inflows have been destructive for many of 2022, based on Refinitiv Lipper knowledge.

Final week’s numbers had been nonetheless destructive, however outflows slowed considerably, signaling extra curiosity, based on Tom Kozlik, head of municipal analysis and analytics at HilltopSecurities. 

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One of many causes could also be a better so-called municipal-Treasury ratio, evaluating muni bonds and practically risk-free Treasury yields, defined Kozlik. The upper the proportion, the extra enticing muni bonds turn into.

“I am not essentially saying we will see an entire turnaround within the subsequent week or two,” he stated. “However we’re going to see bits of strengthened demand via the summer time.”

With many muni bonds maturing in June and July, he expects buyers to roll their a refund into these property, contributing to optimistic inflows. 

A preferred asset for greater earners, muni bonds usually keep away from federal taxes on curiosity and should skirt state and native levies, relying on the place you reside.

“I believe that public finance upgrades will outpace downgrades in 2022,” stated Kozlik, pointing to “very sturdy” credit score rankings.