Record or austere? What to expect from the municipal bond market in 2022


A persistent “golden age of public finances” or a relatively calm period of budgetary reflection?

Experts in the municipal bond market have different views on what 2022 will bring, although there is one constant: demand for debt issued by state and local governments is expected to remain exceptionally strong.

“Overall, the municipal market is fundamentally as strong as it has been for several years,” said Paul Malloy, municipal investment manager at Vanguard.

“There was significant federal aid in 2021, tax revenues are up, the market is back SPX,
have been strong, and that helps pension funds, ”Malloy told MarketWatch. “The real question mark for 2022 is the level of interest rates and their impact.”

Malloy believes that federal aid distributed over the past two years in response to the COVID-19 pandemic will keep municipalities “flush with cash” and less likely to sell bonds in 2022. His forecast of $ 400 billion of new issues would make 2022 just one of the leanest years of the past decade. As of November of this year, $ 432 billion has been issued, according to SIFMA.

In contrast, Tom Kozlik, head of municipal research for Hilltop Securities, expects a record 2022, with $ 495 billion in issues. Kozlik has called the current moment a “golden age of public finances” because of the spending possibilities opened up by federal largesse.

While there is no precise way to predict how the municipal market – tens of thousands of state and local governments, transport agencies, universities and more across the country – will perform, it should be noted that multiple sources who spoke to MarketWatch in November universally appreciated the fact that federal aid would allow them to avoid the expense – and administrative headache – associated with issuing bonds.

One thing is certain: the relatively meager supply will continue to support bond prices. Eric Kazatsky, head of municipal strategy at Bloomberg Intelligence, estimates that the market could support $ 475 billion in issuance.

This will pursue an inordinate demand. Throughout 2021, several consecutive weeks have seen municipal bond fund inflows break records. A closely watched measure, the ratio of 10-year municipal yields to those of comparable US Treasuries, TMUBMUSD10Y,
was around 64% at the end of November, according to data from IHS Markit, below the long-term average of around 80%, and suggesting that investors were willing to pay more for the tax benefits the munis bring.

This is Kazatsky’s premise for 2022: “Municipal buyers will always be motivated by tax evasion, in the absence of a significant personal tax cut,” he wrote in an article. on the outlook, “while the low correlation of bonds with other asset classes could prove their” safer “status – a safe haven if the economy is struggling in an era of rising rates. “

The question of how the economy might behave – whether in the face of the normalization of monetary policy or simply the end of the global pandemic – also sets up some differences among municipal experts on how to invest.

Malloy of Vanguard believes there are pockets of value in areas that “have not fully recovered from the pandemic,” including higher education and some student housing deals. But others are more suspicious: Kozlik takes a cautious or even negative view of higher education, noting that “college campuses are not as sure as expected from the spread of the virus.”

And despite the fact that municipalities are now in good shape, Kazatsky writes that he continues to prioritize bonds “with identifiable revenue streams over stand-alone general bond commitments” – that is, those back-to-back. to taxes. Moreover, he added, if stocks pull back or interest rates rise, it could exacerbate fixed costs inherited from these governments, such as public pensions.


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