Individual investors are streaming into the municipal bond market, pouring $58.8 billion more in munis in the first quarter of 2023 than they did during the same period last year.

Household ownership of municipal bonds – the largest category of muni ownership – stood at $1.669 trillion at the end of the March, a 3.7% jump from the same period in 2022.

We’re not surprised.

Yields are at levels we haven’t seen in years. Thirty-year, A-rated municipal bonds, for example, have a taxable equivalent yield of about 7.11% for investors at the 40.8% tax rate.

Higher yields mean more tax-free income

“Ultimately, the case for fixed income generally, and munis specifically, is much stronger today than it was a year ago,” a municipal bond fund portfolio manager told The Bond Buyer.

“We’ve seen this massive increase in yields, and what that means is that there is income in fixed income for really the first time in a long time.”

Additionally, as yields swell, new issuance is slowing.

Through the end of April, new issuance dropped about 25% compared with the first four months of last year and is about 12% lower than the 10-year average.

From January through April, new issuance totaled about $108 billion, while in 2022, it was about $144 billion. The 10-year average in new issuance is about $123 billion.

Analysts expect below-average supply to continue.

Factors that may be affecting supply include volatility in the Treasury market and higher interest rates, according to a Raymond James report.

While supplies tighten, it is also important to note that summer is traditionally when we see large redemptions. Analysts said between $88 billion to $100 billion of municipal bonds will either mature or be called during June, July and August.

“While this is less than in recent years, mostly due to fewer current refundings, if the trend of lower supply continues, we could see a supply-demand imbalance in the muni market,” the report said.

Lock in yields

Despite attractive long-term yields, some investors still have idle cash sitting in money-market funds at rates that are likely to be short lived.

Maybe they’re parking their cash because they’re skittish about the future prospects of the economy or concerns over market volatility. Or perhaps they are waiting and hoping muni yields rise even further.

Regardless of the reason, common sense and decades of experience tell us it is impossible to accurately and consistently time the market.

Municipal bonds are doing what they’ve always done: Providing a steady stream of tax-free income that enables investors to sleep peacefully at night. It helps explain why so many individuals are streaming into the market.

Investors on the sidelines, however, risk squandering the opportunity to lock in attractive yields and keep their interest clock ticking.