Back in business Back in business\images\insights\video\business-people-garden-talking-small.jpg May 2 2023 May 2 2023

Back in business

Munis may see heightened demand this year.

Published May 2 2023
My Content
Video Transcript
Question: Why might municipal bonds see heightened demand in 2023?
RJ Gallo: A lot of muni bond buyers are very yield sensitive. A number of muni buyers want to buy a high-quality bond and put it away, they're not necessarily looking to trade in and out of their securities. Those buyers became very attracted to munis in the latter quarter, the end of last year, and then into the beginning of this year because they now are seeing yields near the highest levels of over the last 10 years or so. The yield-oriented buyer thus perked up, started stepping into the markets and started buying bonds. I think there's another factor that's contributing to strong muni demand as well. Number one, munis are a very high-quality asset class. The average credit quality of the muni index is AA rated, and despite a few isolated problems in the municipal market over the years, the default risk is very, very low. That makes municipal bonds a high-quality asset class as we head into a potential recession, that's a good place to park your money without worrying about credit risk, and as a result, that as well as the higher yields have helped to support muni demand in the last three to six months.
Tags Fixed Income . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

The S&P Municipal Bond Index ("Index") is a broad, comprehensive, market value-weighted index composed of approximately 55,000 bond issues that are exempt from U.S. federal income taxes or subject to the alternative minimum tax (AMT). Eligibility criteria for inclusion in the Index include, but are not limited to: the bond issuer must be a state (including the Commonwealth of Puerto Rico and U.S. territories) or a local government or a state or a local government entity where interest on the bond is exempt from U.S. federal income taxes or subject to the AMT; the bond must be held by a mutual fund for which Standard & Poor's Securities Evaluations, Inc. provides prices; it must be denominated in U.S. dollars and have a minimum par amount of $2 million; and the bond must have a minimum term to maturity and/or call date greater than or equal to one calendar month. The index is rebalanced monthly.

Credit quality is subject to change. 

Income from municipal funds may be subject to the federal alternative minimum tax and state and local taxes.

Federated Investment Management Company