Individual ownership of municipal bonds climbed in the second quarter as investors pounced on munis “priced to perfection.”
As of the end of June, households continued their starring role in the bond market. They remained the largest group of muni owners (43%), followed by mutual funds (19.4%) and banks (13.9%), according to The Bond Buyer.
“Anecdotally, individual investors remain the most important participant in the municipal bond market and the providers of liquidity,” a credit strategist told the trade publication.
Households owned $1.695 trillion of municipal bonds, a bump of .7%, or $11.9 billion over the first quarter.
Demand up, supply down
The uptick in muni investments by individuals continues a trend we noted from the first quarter (“Muni Rolls Swell Amid Higher Yields”).
It is also consistent with another phenomenon we are seeing in the market – an increasing number of investors assembling their own portfolios of municipal bonds with the assistance of professionals (“More Muni Investors Selecting Their Own Bonds”).
Meantime, as investors snap up bonds, new issuance has declined.
As of the end of August, total issuance year-to-date dropped 15.1% compared to the same period last year, from $288.204 billion to $244.677 billion.
Analysts attributed the decline to issuers’ strong fiscal position. Buoyed by robust tax receipts and federal Covid aid, many are choosing to fund capital projects from internal funds instead of issuing debt. Additionally, higher rates are squelching advanced refundings.
How high for how long?
For those following the Federal Reserve Board, the phrase “higher for longer,” as it pertains to interest rates, has resonated for months.
Speak to a Muni Pro
You've enjoyed reading our insights, now speak with the pros to find the right bonds for you.
But how much the Fed might hike rates and for how long is anyone’s guess. Even if we see relatively high rates later on, they may still be lower than they are today.
In other words, trying to outguess the market is a fool’s errand.
What we can say for certain is that municipal bond yields are at levels we haven’t seen in years – “priced to perfection,” as one analyst told The Bond Buyer.
The temptation for some investors to try to time the top of the rate cycle is unwise.
No one knows when this will happen – perhaps it is now.
