In other words, fund investors experience price declines and then begin to withdraw money from those funds. We’ve found that when returns are negative, historically fund flows turn negative shortly afterward. If interest rates rise, as we expect, the pace of fund flows should slow and may even turn negative. The imbalance may ease because of a slowdown in demand. Sources: Bloomberg and ICI, as of 11/17/21 This led to higher prices and tighter spreads.ĭemand for munis has been strong yet supply hasn’t kept pace Meanwhile, the supply of tax-exempt munis over the same period wasn’t nearly enough to meet the strong demand. As of November 17, flows into muni mutual funds and ETFs have been positive for 78 of the past 80 weeks according to the Investment Company Institute, signaling strong demand. 1 It is also a contributing factor to tight spreads and the riskier portions of the muni market outperforming those with less risk. We expect the supply-and-demand imbalance to ease in 2022Īn imbalance between supply and demand is one of the reasons that munis have outperformed other fixed income asset classes this year. Past performance is no guarantee of future results. Securitized: MBS/ABS/CMBS and Covered Index (“ Securitized bonds”), Bloomberg US Corporate Bond Index ("Corporate bonds"), Bloomberg US Agg Agency Index (“Agency bonds”), Bloomberg US Aggregate Bond Index ("Core bonds"), Bloomberg US Treasury Index ("Treasury bonds”). Corporate High-Yield Bond Index (“High-yield corporate bonds”), S&P/LSTA Leveraged Loan Index (“Bank loans”), ICE BofA Fixed Rate Preferred Securities Index (“Preferred securities”), Bloomberg Municipal Bond Index (“Municipal bonds”), Bloomberg Municipal Index Taxable Bonds ("Taxable municipal bonds"), Bloomberg U.S. Bloomberg High Yield Municipal Bond Index ("High yield municipal bonds"), Bloomberg US Treasury Inflation Notes Index (“TIPS”), Bloomberg U.S. Munis have performed relatively well so far in 2021 As a result, credit concerns ebbed and prices on muni bonds didn’t fall as much as other fixed income sectors, resulting in munis outperforming most other highly rated fixed income sectors. The economy also recovered much quicker and stronger than expected.
Instead, Washington threw a life raft to the muni market. Treasury bond).Įarly in 2021, there were concerns that the ongoing pandemic would create waves for the finances of some municipal issuers and lead to downgrades. Portfolios that are appropriately positioned should benefit from the rise in spreads and yields over time (a spread is the difference in yield between two bonds of comparable maturity, and reflects the additional compensation investors require to own a security relative to a highly rated alternative, such as a U.S. This may result in near-term price declines, but we expect there will be opportunities for higher yields. Our outlook for 2022 is that both spreads and yields should modestly increase. Current low yields and tight spreads in the municipal bond market have made it difficult for investors to find opportunities to earn attractive interest income on their investments.
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