Posted by Lawrence Gillum, CFA, Fixed Income Strategist
Wednesday, March 29, 2023
After one of the weakest February’s on record, the municipal market is on track for its strongest March performance since 2008, as it benefits from a flight to safety amid turmoil in the banking industry. The Bloomberg Municipal Index is up nearly 2% (so far) this month bucking the historical trend of March being the worst month for muni investors. Since 2011, the Bloomberg Municipal Index has lost -0.39%, on average, in March, making it the worst month for the index. The good news for muni investors? The next two months have been good months for muni investors with April and May generating, on average, monthly returns of 0.25% and 0.97%, respectively.
That said, the ongoing banking sector stress could bleed into the municipal market. U.S. depository institutions hold $580 billion of municipal debt—14% of total municipal debt outstanding—according to Federal Reserve (Fed) Flow of Funds data as of year-end 2022. Moreover, according to FDIC Q4 2022 call report data, approximately 57% of bank muni holdings were available for sale. So, there remains a chance that banks could sell municipal holdings and use the cash to shore up balance sheets and/or potentially raise liquidity to meet customers’ withdrawal demands. With the Fed’s new lending facility though (which we wrote about here), the need to quickly sell securities in times of stress has been reduced, in our view.
A further wildcard remains how investors will react going forward. While flows into muni mutual funds have generally been positive this year, the last six weeks have seen outflows (according to the Investment Company Institute). If demand stabilizes, along with what is expected to be a light month (April) of new issuance, the supply/demand picture could be a favorable one for munis over the next few months. Nonetheless, with starting index yields still above longer term averages, and with the fundamental story still a positive one, we would see any municipal sell off as a potential buying opportunity.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.