Individual Investors Swelling Muni Market

Klotz on Bonds

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James A. Klotz

The municipal bond market grew in the fourth quarter of 2023, and individual investors led the charge, according to Federal Reserve Board figures.

The market value of municipal bonds swelled 6.6% from the third quarter of 2023 and 3.5% from the fourth quarter of 2022. The total market value at the end of 2023 was $4.1 trillion.

Individuals continued to be the biggest owners of municipal bonds, accounting for almost 44% of the market, followed by mutual funds, ETFs, banks and insurance companies.

Individual investors swelling muni market

Analysts attributed the fourth quarter buildup to optimism for possible rate cuts by the Fed and progress on inflation, as well as attractive yields, according to The Bond Buyer.

Focus on individual issues

Interestingly, there was a surge in investors owning individual bonds, whether through brokerage accounts, fee-based advisory accounts or separately managed accounts. These holdings, which totaled $1.766 billion at the end of last year, were up 8.8% from the third quarter of 2023 and 9% from the end of 2022.

Given the lower transaction costs of individual bonds, the trend is expected to continue, a senior municipal strategist at Oppenheimer told The Bond Buyer.

Sidelined cash

As the municipal market grows, there is a considerable amount of cash on the sidelines (“Parking Problem: How Muni Investors Lose Out”). Global investors plowed a record $1.3 trillion into cash in 2023, Reuters reported.

Financial advisors think at least some of those funds may find their way into municipal bonds.

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    One reason may be the yields on investment-grade bonds, which are near their 15-year highs. Additionally, as investors prepare their taxes, some might sell their bonds to pay Uncle Sam while others jump into the market and take advantage of the juicy yields, according to InvestmentNews, a news source for financial advisors.

    Also, some tax cuts that were part of the Tax Cuts and Jobs Act expire after the 2025 tax year, which could lead to higher taxes and enhance the value of tax-free income.

    Maximizing tax-free income

    So where does that leave us?

    The latest data shows individual investors like what they’re seeing in the municipal bond market. Of course, long-time investors always keep their interest clock ticking. They find the headlines interesting but not determinative. They know that trying to time the market never works over time and locking in attractive yields for the long term is the way to maximize tax-free income.

    Will the Fed cut interest rates? If so, when? We don’t know for sure.

    We are confident, though, that if the Fed does begin trimming rates, long-term rates – the focus of municipal investors – will follow, and those who parked their cash trying to outguess the market will wish they hadn’t.


    James A. Klotz is the President of FMSbonds, Inc.
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    Mar 20, 2024

    Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.