Lynne Funk

The Investment Company Institute reported investors poured in $1.589 billion into muni bond mutual funds in the week ending August 3, the highest level since November.

Several large new issues priced. Municipal yields were little changed, U.S. Treasuries were weaker on the short end and stocks ended in the red ahead of the much-anticipated July inflation figure.

Weekly supply is holding below $5 billion, reinvestment needs are still in effect from large redemptions and fund flows are leaning more positive, noted FHN Financial's Kim Olsan.

With the Fed committed to fighting inflation with aggressive rate hikes, fewer issuers want to take the risk with taxable advance refundings.

Munis are improving, but positive second-half municipal returns likely won’t be enough to offset the major losses of the first half of the year.

Investors pulled more from municipal bond mutual funds, with Refinitiv Lipper reporting $1.3 billion of outflows, down from the $1.6 billion the week prior and bringing the total to $47 billion year-to-date.

Municipals posted gains for the first time in 2022 in May, outperforming U.S. Treasuries on the month. The Bloomberg Muni Index posted a 1.49% return in May bringing losses down to 7.47% year to date.

June redemptions will be the highest of the year at $50.6 billion. New-issue supply — 30-day visible is currently at $15.5 billion — is unlikely to keep up.

The rapid swing to lower yields over the past week has led to a sunnier outlook for the summer reinvestment season, but uncertainties on the economic front, rate volatility, and supply questions hang overhead.

Given the volatility of risk assets is likely to remain high, and the focus on the flight to safety increases, all fixed-income assets could benefit as a result, including municipals, Barclays strategists say.

Refinitiv Lipper reported $2.712 billion of outflows, bringing the total outflows so far in 2022 to $65.8 billion, surpassing the last largest annual outflows of $63.5 billion during the Taper Tantrum in 2013.

Investors pulled $7.270 billion from muni bond mutual funds in the week ending May 11, per ICI data, while exchange-traded funds saw $1.756 billion of inflows, the fourth week of record inflows.

Deep-in-the-red municipal returns are not helping assuage investor concerns, creating a negative feedback loop that has yet to see a pause.

Despite compelling yields and ratios, buyers continue to be selective. Even if rates stabilize, municipal investors will likely be cautious for some time, waiting for fund outflows to abate, strategists said.

New York Dormitory Authority school bonds and Northwell Health priced and upsized, while Wisconsin and Oregon offered general obligation bonds. Analysts say municipal curves are oversold, creating a buying opportunity.

How technology, data and transparency can aid in rough markets. Lynne Funk talks with Stephanie Sparvero of Bloomberg BVAL. (21 minutes)

Despite outsized volatility and liquidity challenges ahead, the possibility of relief for munis is not too far off, analysts say, but USTs lead the way for exempts.

Municipal returns in April were deeply negative, bringing the year-to-date figure to near 9% losses, the largest posted on the Bloomberg Muni Index since its inception in the 1980s.

Another swing in U.S. Treasury market pushes muni to UST ratios out long even cheaper.