Primary bond market

Refinitiv Lipper reported $68.054 million was pulled from municipal bond mutual funds in the week that ended Wednesday after $775.006 million of inflows the week prior.

Inflows continued with the Investment Company Institute reporting investors added $2.194 billion to mutual funds in the week ending Feb. 8, after $1.471 billion of inflows the previous week.

"Markets were expecting (hoping, praying) to get further confirmation that a peak is in and the decline is at least steady, if not accelerating," said Jan Szilagyi, CEO and co-founder of Toggle AI.

February municipal bond activity compared to last month is brisk yet more finicky in the face of an ongoing supply shortage, according to Jeff Lipton, head of municipal credit and market strategy and municipal capital markets at Oppenheimer & Co.

Total volume in 2022 was at $389.094 billion in 9,123 deals, down 19.5% from the $483.358 billion in 13,130 deals in 2021, according to Refinitiv data.

The transportation bond sector may see the greatest growth in 2023 as a result of the infrastructure act, one analyst said.

"This peculiar shape of the muni yield curve has created a conundrum for investors, as all high-quality municipal bonds, with the possible exception of the long end, have become quite rich," Barclays strategists said.

Inflows returned as Lipper reported $775.006 million was added to municipal bond mutual funds in the week ended Wednesday after $361.649 million of outflows the week prior.

Although there is some volatility in the municipal market, the landscape is in good shape, according to Cooper Howard, fixed income strategist at Charles Schwab.

"The market started the year with a reduction of the oppressive pressure caused by last year's heavy net outflows from mutual funds," said CreditSights strategists Pat Luby and Sam Berzok.

"We did see some bump in the curve as a result of the FOMC hiking rates by 25 basis points on Wednesday," said Jason Wong, vice president of municipals at AmeriVet Securities. "However, with an unexpected high employment number, fixed-income yields rose."

Friday's payrolls "surprised to the upside, with nonfarm payrolls increasing 517,000 last month after an upwardly revised 260,000 gain in December," Barclays strategists said.

A few developments in recent sessions "may have staying power should the new outlook on upcoming FOMC actions gain traction," said Kim Olsan, a senior vice president of municipal bond trading at FHN Financial.

"Investors are acknowledging that the Fed is nearing the end of its rate tightening cycle which is supporting a relief rally in stocks and lower bond yields, said Bryce Doty, senior vice president at Sit Investment Associates.

Total volume for the month was $21.931 billion in 417 issues versus $26.292 billion in 770 issues a year earlier, according to Refinitiv data.

"January issuance is at a multi-year low, with large declines in both taxable and tax-exempt issuance," said Matt Fabian, a partner at Municipal Market Analytics. 

Investors will likely sit on the sidelines until after this week's Federal Reserve Board rate announcement.

Investors will be greeted Monday with a new-issue calendar estimated at $847 million.

On the buy side, lower interest rates and an extreme imbalance between supply and demand is supporting the municipal market's positive tone, according to JB Golden, executive director and portfolio manager at Advisors Asset Management.

The top bond counsel firms combined for a total of $359.123 billion in 7,878 transactions during 2022, down from the $456.136 billion in 11,819 deals in 2021.