Municipal bonds are no longer flying off the shelves, marking a major departure for the asset class as it is poised to suffer the biggest monthly loss since the peak of pandemic-fueled market chaos in early 2020 .
The $4 trillion market sell-off is weighing on new bond issuance by US states, cities and local agencies, stinging underwriters and issuers on Wall Street. In just two examples, the Metropolitan Washington Airports Authority and the New York City Transitional Finance Authority saw weak demand for transactions last week.
Investors are balking in the bond market as they brace for Federal Reserve rate hikes as early as March. For municipal issuers, this is a stark change from the rabid demand seen last year. Large, highly rated borrowers have a harder time pricing debt at the yields originally offered, and some deals must have been cheap, said Brad Libby, portfolio manager of the $2.1 billion Hartford Municipal Opportunities Fund. dollars.
“They certainly struggled in the first two weeks of the year,” he said. Higher-rated deals might struggle more because that part of the market is relatively expensive, Libby said.
Muni issuers have had the upper hand for most of the past year as investors poured in cash, in part as Washington lawmakers debate raising taxes on the wealthy. Today, anxiety about the prospect of tighter monetary policy and high inflation has set in. The muni market lost 1.7% in January, the pace of the largest monthly losses since March 2020, according to data from the Bloomberg index.
For the first time in 10 months, investors withdrew money from muni mutual funds, according to Refinitiv Lipper US Fund Flows data for the week ended Jan. 19. Bids posted on Bloomberg’s Dealer Bid System reached $10.8 billion on Tuesday, compared with an annual average of about $8 billion.
The weakness in the primary market is unusual, although not as severe as in March 2020 when trades were entirely scuttled.
Last week, the Metropolitan Washington Airports Authority had to offer a second order period as part of a toll road bond sale, according to two people familiar with the matter who spoke on condition of anonymity because discussions around the agreement were private. This is a rarity for a market that has grown accustomed to offerings being oversubscribed.
A spokesperson for the airport authority had no immediate comment, nor did a spokesperson for Wells Fargo & Co., the underwriter.
Meanwhile, the New York City Transitional Finance Authority saw weak demand during a selloff last week. Some of the debt was unsold at the end of the order period and yields on some maturities were raised by 1 to 3 basis points, according to a person familiar with the deal who asked not to be named because the Discussions surrounding the operation were private.