Secondary bond market

Fixed-income markets have had a tough 2022 but municipal bonds have been among the ones that have struggled the most.

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.

On the buy-side, weakness, outflows, supply issues, and poor liquidity are making life challenging for municipal bond investors. The same could be said for issuers.

While only 12% to 15% of municipal bond trading volume is performed electronically, various market participants say the time to embrace new technologies is now.

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.

Investors pulled more from municipal bond mutual funds in the latest week, with Refinitiv Lipper reporting $2.446 billion of outflows, though that was down from $2.669 billion of outflows in the previous week.

Outflows continue with the Investment Company Institute reporting $6.167 billion pulled from muni bond mutual funds in the week ending May 4, up from $5.371 billion of outflows in the previous week.