Muni ETFs have set a record for inflows this year drawing a whopping $83 billion. Bond buyers are fleeing the low yield big government debt with inflation risk and flocking to Muni funds which have more attractive fees and still have some after-inflation yield. Active funds are seeing a large uptick as a subsegment with big winners like JPMorgan Ultra-Short Muni Income ETF, and new active funds are popping up at a fast rate. Institutional investors see lots of growth in active fixed-income ETFs as more investors are chasing outperformance in a stagnant bond market.
FINSUM: As the Fed comes down on the treasury market, muni’s are in a prime position to get yield pass through to fight against inflation.
Munis have had a great year. Ever since Biden’s election, munis have surged in value because of two core assumptions. The first, and by far the biggest, is that taxes were likely to rise with Democrats in power. The second is that the Democrats would be more financially supportive of states and local governments. In the immortal words of Lee Corso, we’re here to say “not so fast!”. The assumption that taxes are going to rise looks weaker and weaker, and the same goes for the financial support for states.
FINSUM: The Democrats were not able to force through tax rises alongside this major infrastructure package, and their chances of getting any tax hikes through before the midterm elections looks poor.
When you think of all the risks and all the opportunities for the muni market right now, you might be missing one of the very biggest. While a lot of talk has focused on how Biden and the Democrats—and their respective tax packages—could help muni finances, the reality is the drought out West is a big risk to the muni market. 75% of the West is in an extreme drought right now, representing almost 60m Americans. If that continues it could significantly impact muni finances.
FINSUM: Only 26% of the muni market lies in the drought area, which mitigates systemic risk, but very issuers could be badly hit. Be careful of large muni holdings in drought-stricken areas.