"2022 Mid-Year Market Update"

In 2021, demand in the municipal bond market far exceeded supply, with low volatility and absolute and relative yields closing at or near historic lows. That changed in 2022 as rising inflation and subsequent increases in short-term interest rates by the Federal Reserve Board (Fed), as well as concerns about the Fed reducing its balance sheet, caused interest rates across fixed income products to rise. The supply/demand equation changed rapidly, as mutual funds, the largest buyer of municipal bonds, especially in the long end, became significant sellers to meet unprecedented outflows in the first half of the year ($88 billion through June 29).2 Benchmark yields rose 170 basis points or more and credit spreads widened. Taxable issuance, which accounted for over 27% of total bond issuance in 2020 and 2021, plummeted to 15% year-to-date and only 8% in June.

While mutual funds saw significant outflows in the first half of 2022, individual investors, who had seen their share of municipal bond holdings decrease over the years, stepped in, especially in May and June. A dramatic increase in the number of trades in the second quarter is mostly attributed to a significant increase in demand for municipal bonds by individual investors.3 As benchmark rates were reaching levels not seen since 2013, trading volumes for municipal bonds reached record levels, with the daily average number of trades in May reaching nearly 58,000, almost double the 29,683 daily average in 2021. Tax-exempt Exchange-Traded Funds (ETFs) also saw significant inflows in contrast to mutual funds, with trading volumes climbing to unprecedented levels in the first half of 2022, up 410% over 2021.