Fixed income investors have found stability and stable returns in municipal bond exchange traded funds this year.
Over the summer, the yield on the S&P Municipal Bond Index dipped below 1% for the first time since it was created in 1998, the Wall Street Journal reports.
Even with yields falling, investors can’t get enough of munis. Prices have strengthened even while outstanding muni debt expanded by over $100 billion for the year ended March 31, according to Federal Reserve data. Looking ahead, municipalities and states could continue to sell an additional $89 billion in bonds without meaningfully affecting prices, according to an analysis of lending capacity by Municipal Market Analytics. Bond yields have an inverse relationship with prices.
Supporting the demand for munis this year, there are growing concerns that President Joe Biden and the Democratic-controlled Congress could raise taxes. Consequently, muni bonds and the tax-free income they provide now appears more attractive to many investors.
Additionally, many states, cities, and counties have come out of the COVID-19 pandemic better than previously anticipated, mitigating fears that pandemic-related budget shortfalls would weigh down the value of local-government debt. Moody’s Investors Service even upwardly revised its outlook on state and local governments to “stable” from “negative” in March, pointing to the better-than-expected revenue and federal stimulus measures.
Most of the recent demand for munis is coming from asset managers deploying an increased stream of investor cash. Over the first seven months of 2021, investors funneled $69 billion into municipal bond mutual funds and ETFs, the most of any year since record-keeping began in 1992, according to data from Refinitiv Lipper.
“Every time a new deal comes to market, there’s this food fight from the institutional investors to grab as many bonds as they can get,” Eric Friedland, director of municipal-bond research at asset manager Lord Abbett & Co., told the WSJ.
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