Municipal bonds are off to a bad start since 2011.
The bond route for the first year reduced the return of the S & P Municipal Bond Index to minus 1.1% until January 20, taking into account price fluctuations and interest payments. This loss is an early sign that rising interest rates could make 2022 more volatile than last year. At this time, federal stimulus and rising demand from home savers resulted in record low volatility and historically high prices.
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Investors are now looking more carefully at these prices. According to Refinitiv Lipper, municipal bond trusts and exchange-traded funds have earned a net amount of $ 830 million by January 19, compared to $ 6.1 billion last year.After the Federal Reserve Board They have shown that short-term interest rates can be raised Municipal bond yields skyrocketed faster than expected Alongside Treasury yields According to Refinitiv Municipal Market Data, 10-year AAA municipal bond yields rose from 1.03% on December 30th to 1.28% on January 20th. When bond prices go down, yields go up.
State and local governments typically issue long-term debt in the approximately $ 4 trillion municipal bond market for capital projects such as highways and schools. Wealthy investors admire Muni because they throw away interest, which is mostly exempt from federal and often state taxes.
However, rising interest rates make issued bonds with relatively low yields less attractive and can be a concern for those who hold or buy Muni debt. In addition, the cost of borrowing by state and local governments has increased, and duty-free borrowing has fallen to $ 9.2 billion, the lowest level in four years until January 20, this year. The city of Greenwich, Connecticut issued a one-year debt with a net interest rate of 0.21% in the first week of January, according to Comptroller Peter Minalski.
Some analysts also expect demand for Munis to decline this year as household savings are expected to slow. Increased during a pandemicEspecially for the wealthy.
The desire for tax exemption has long exceeded annual issuance.The imbalance has widened over the past year as high-income Americans have moved their savings and the wind and rain they have gained. Acquisition of blockbuster stocks For local bonds. Analysts do not expect these inflows to continue at the same pace this year.
Creditworthiness could become a bigger issue for some struggling cities as it continues to use the wave of federal pandemic aid in 2022. That aid will strengthen local government credit in 2021, when fiscal upgrades slightly outweighed the downgrades by Fitch Ratings, as well as tax revenues from purchases made through stimulating checks and stimulating fuel stock acquisitions. It was useful. In 2020, the pandemic closed the local economy and put pressure on services, causing Fitch to downgrade 80% more than upgrades.
Sustain inflation Some analysts said it could exacerbate credit problems by pushing up the cost of adjusted retirement benefits for government projects, services and living expenses.
“How good is Muni Credit if the budget baseline has to rise by 5%?” For several years in a row? Adam Stern, co-head of research at Breckinridge Capital Advisors, asked. “It can be processed in some places, but it may not be processed in other places.”
Defaults are very rare in local markets. However, debt issued by poor borrowers tends to fall in price under adverse financial conditions, depressing the value of the investor’s portfolio and creating a dilemma for those who want to cash out.
In a sense, the increased potential for volatility in 2022 marks a return to a more accessible investment climate after a year of extraordinary calm following a year of Covid-related turmoil.rear Liquidity crisis In the early years of the Pandemic, according to data from the municipal bond market analysis, the 2021 municipal bond market had a record of 113 days, when AAA interim maturity bond yields remained unchanged from the previous day.
“2020 was unusual in terms of volatility,” said Michael Zezas, a local government strategist and head of public policy research in the United States.
“2021 was unusually calm. This is a return to normal.”
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Rising interest rates hit the municipal bond market
Source link Rising interest rates hit the municipal bond market