Investors revisit municipal bonds amid higher yields and strong credit

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It’s been a tough year for municipal bonds, with investors cashing in amid rising interest rates. However, higher yields and strong credit could trigger change, experts say.

While investors amassed a record $96.8 billion of net money in U.S. mutual funds and exchange-traded funds in 2021, weekly inflows have been negative for most of 2022, according to data from Refinitiv Lipper.

Last week’s numbers were still negative, but outflows have slowed significantly, signaling more interest, according to Tom Kozlik, head of municipal research and analysis at HilltopSecurities.

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One reason may be a so-called higher municipal-to-treasury ratio, comparing muni bonds and treasury yields almost risk-free, Kozlik explained. The higher the percentage, the more attractive municipal bonds become.

“I’m not necessarily saying we’re going to see a complete turnaround in the next week or two,” he said. “But we’re going to see elements of stronger demand throughout the summer.”

With many municipal bonds maturing in June and July, he expects investors to pour their money back into these assets, contributing to positive inflows.

I think upward revisions to public finances will be faster than downward revisions in 2022.

Tom Kozlik

Head of Municipal Research and Analytics at HilltopSecurities

A popular asset for high earners, municipal bonds generally avoid federal interest taxes and can bypass state and local levies, depending on where you live.

“I think the upward revisions to public finances will outpace the downward revisions in 2022,” Kozlik said, noting the “very strong” credit ratings.


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