The municipal-bond market is ending its worst quarter in about 40 years with a 6.4% loss, a dramatic pullback for an asset class that investors favor for its stability.
The loss so far this year is in line with bonds globally as central banks increase interest rates to combat the fastest inflation in decades. The municipal market is still underperforming U.S. Treasuries, heightening investor concern.
“We need this quarter over with,” said Dan Solender, head of municipal debt at Lord, Abbett & Co.
The selloff has wiped $108 billion of market value from Bloomberg’s municipal index since the start of 2022. Outflows from mutual funds have persisted, creating intense selling pressure in the secondary market for municipal securities.
The amount of bonds out for bid stood at $1.2 billion on Wednesday, a level not see in all of 2021, according to Bloomberg data.
“It’s finally sinking in -- investors now believe that rates are going higher,” said Chris Johns, a managing director at Davidson Fixed Income Management. Retail investors, the core muni buyer base, have an “itchier trigger finger” when they see that interest rates are set to rise, he said.
Analysts have begun highlighting cheaper valuations in the municipal-bond market as an opportunity for new buyers. Thirty-year AAA municipals offer about 106% of the yield of comparable Treasuries, the highest since late 2020, according to data compiled by Bloomberg. That gauge of valuations, known as the muni-Treasury ratio, was as low as 67% in June 2021.