For Municipal Bonds, 2022 will be one of those years that investment manager selectors look at closely when evaluating portfolio's in the future. Investment Grade Municipal Bonds posted their worst calendar year performance in 20 years, and third worst on record.
The irony for municipal bond investment managers was that across all maturities and ratings, municipal bonds generally outperformed most other fixed income segments, including treasuries and corporate bonds. And yet, outflows were almost double the levels experienced during the 2013 taper tantrum.
To add psychological pain to performance suffering, this all happened in parallel with fundamentals actually also breaking some records. Local tax collections were higher than the previous record set in 2021. And defaults were contained to specific high yield sectors and lower than 2021.
Relatively speaking, municipal bonds had an outstanding 2022. But investors were simply not convinced. As we enter 2023, perhaps the relative fundamental and performance picture will regain investor attention. But so far, the opposite has happened.
2023 Municipal Bond Outflows Continue
As of the end March 2023, the municipal bond market has seen $1.5bn of outflows. Intermediate funds, long term funds, and high yield funds, are all recording outflows, on the back of $70bn of new issuance year to date. However, stress in the banking systems does not seem to have negatively affected the municipal bond market.
On a security level, Gas prepay tax-exempt securities and short term municipal VRDNs typically have the credit backing/structuring of large stable financial institutions. In fact, pricing across the curve has seen high grade municipal yields move lower for securities backed by these firms. The same cannot be said of securities backed by regional banks, but these are limited in volume.
Muncipal Bonds Seeing A Flight To Quality
March 2023 has defied it's usual negative monthly performance and the market overall is now experiencing a flight to quality. And whilst there is the risk that some regional banks in need of liquidity could sell their municipal debt holdings, most investment managers inside RFPnetworks do not expect widespread selling of tax-exempt municipal securities.
Whether this flight to quality will turn the year to date negative outflows around, remains to be seen.