1Q22 sees massive drop in market valuation; retail muni ownership falls

BY SourceMedia | MUNICIPAL | 06/29/22 03:10 PM EDT By Connor Hussey

The value of outstanding municipal debt saw the largest single quarterly decline in the first quarter of 2022 since the tracking of municipal market data began in 1945, according to a Municipal Securities Rulemaking Board report.

The muni market lost $300 billion in market value in Q1 2022, a decline of 6.8% and largely attributable to the overall rise in interest rates and its negative effect on prices, said John Bagley, chief market structure officer for the MSRB said. The MSRB's report, released Wednesday, used Federal Reserve data.

While the muni market didn?t shrink with respect to outstanding debt, its value did as the market has experienced the worst losses in more than 40 years since the start of the year.

MSRB chief market structure officer John Bagley
Outstanding municipal bond growth has continued. From 2004 to March 2022, the municipal bond market grew to $4.1 trillion outstanding from $2.8 trillion, a jump of 47%, according to the report. But those gains were smaller over the last decade, both in terms of actual annual growth and annual growth as a percentage, growing just $7.4 billion in that 10-year span at an annual growth rate of 0.3%. A

The percentage of munis owned by retail continues to fall. The report highlights the shift in bond ownership from 2004 to 2022, with household ownership of munis falling to 40% in 2022 from 54% in 2004.

?Despite this decline, households remain firmly entrenched as the leading municipal securities holder, with mutual funds far behind at 22% of the market,? the report said. ?A sole focus on the stagnant growth and declining share of the household category may be a bit misleading, as many individual investors do not hold municipal securities directly and instead hold them through mutual funds, [exchange-traded funds] and [closed-end funds].?

That shift is what Patrick Luby, senior municipal bonds strategist at CreditSights, calls the ?professionalization of the muni market,? a move from direct retail ownership to retail investors holding munis through separately managed accounts, ETFs and mutual funds.

Fund holdings, which by the MSRB?s parameters do not include SMAs, rose by 145% since 2004 to reach $1.1 trillion of the market at the end of Q1 2022. Funds now represent 26% of total holdings up from 16% in 2004.

The report estimates that SMA holdings reached $776 billion by Q2 of 2021, triple what it was 10 years ago and accounting for 46% of direct household ownership and roughly 19% of the total market.

Mutual fund and ETF holdings are responsible for the majority of the growth, jumping to 22% to 12% and to 2% from 0% respectively.

ETFs are responsible for some of the most rapid growth within fund categories, growing positively in 50 of 56 of the quarters analyzed, the report said.

In 2021, ETFs grew to $85 billion and are expected to continue in that upward trajectory for the remainder of this year. ETFs saw only two weeks of outflows total this year.

Growth in CEF holdings fell slightly, shrinking to $90 billion in 2022 from $95 billion in 2004.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.