Sharp swings dominated the muni market through the first half of 2022. Portfolio Manager Eve Lando shares her take on the market.
What’s Happened to Municipals in 2022
Eve Lando, Portfolio Manager: I’m Eve Lando, portfolio manager for our muni products at Thornburg Investment Management. I am here to talk about muni market in 2022. Now, when thinking about munis in 2022, I think of three periods, beginning of the year to mid-May. Then, interesting two and a half weeks in May, and up to now. So, let me start with the first part or munis before mid-May.
Let’s talk about how quickly and ahead of the Fed did munis move in January. Very quickly, as if a switch has been turned on. As an illustration, yield on 2yr AAA munis in January was 23bps, today it is at 222 bps. This is almost 100% swing. muni AAA scale widened 160-170 bps, surprising us with just by how much and also where on the curve we saw the largest changes: not on the long end as much as in the 2-5 up to 10yr range. So quickly, munis widened, ratios with treasuries spiked.
Outflows: we have seen as much as 72BN leave our market – we haven’t seen outflows this large since 2013, or Taper Tantrum period. Now, our market is quite different than it was in 2013. We are bigger, mutual fund holdings are about 50% bigger. So percentage wise this might not be as drastic. But this time around, the outflows, withdrawals happened in 22 weeks vs 44.
So, these swings presented a great buying opportunity.
Now a few words about May. Suddenly, munis rose in prices. We saw yields tighten as much as 30 to 40 bps. This is a big change in our market. In my observation of the markets, especially muni markets, it is rarely a straight-line descent or ascent for that matter – we have purchases, resting places, pauses if you will along the way.
The two last weeks of May were just that – a pause. This pause – happened as we were approaching summer, usually, the sleepy period for issuance in munis at the same time as we have coupons and maturities coming in heavy in June andJuly. So partly, supply demand story. Also, I mentioned ratios with Treasuries, they made munis quite attractive to crossover buyers, so we’ve had a lot of interest coming in from outside. And then there was a softer message from the Fed, now drastically different than what we have just a few weeks after now in mid-June – which is a great illustration of dynamic nature of the market. And so the sentiment of tightening in May that the muni market was running ahead of the Fed, demand rising against weaker supply, plus stable to strong story from the municipal issuers – we tightened 30-50bps from pre-May pause.
Now, fast forward to today – we gave it all back and then some… Because this market pause occurred against a very prominent background of rising everything – cost and rates. And so, looking forward, we anticipate the continuum of beginning of the year dynamic. Lower prices and higher yields. So, in essence a great buying opportunity. And because of stable to strong credit story at the moment in our market, we feel like everything is on sale. There are more upgrades than downgrades. States posting strong results from income as well as sales taxes. NJ, IL boasting upgrades, so we’re actively buying. Not sitting on sidelines, not being swayed by the headlines, but armed with fundamental credit is the winning strategy, a buying opportunity in munis today
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