Muni Market Grows By A Hair In Q1; Retail ownership grows driven by SMAs

Most sectors showed flat quarter-over-quarter increases in municipal ownership, but year-over-year Federal Reserve data showed the continued trend of increases in separately managed accounts and decreases in bank and insurance company holdings.

According to the latest Fed data, the total amount of munis outstanding reached $4.081 trillion, an increase of 0.6% from the fourth quarter of 2023 and 1% from the first quarter of 2023.

The market value of munis was at $4.001 trillion, down just 0.3% from the fourth quarter of last year, but up 1% from the first quarter of 2023.

Individual bond ownership was the largest category of municipal ownership at 44.5%, mutual funds at 19.1%, exchange-traded funds at 3.1% and US banks at 12.9%. Life insurance companies own 4.7% and property and casualty insurers 5.3%.

“The data signaled a continued focus on an emphasis on retail, particularly SMA-led retail,” said Matt Fabian, a partner at Municipal Market Analytics.

The overall numbers were “more or less stable” with some ongoing cuts by banks and insurance companies, he noted.

“The Fed’s data is reflecting some of the big picture trends we’re seeing unfold right now,” said Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.

“Above-average primary issuance, particularly new money activity, is driving the overall numbers and trends up a bit,” while holdings of certain categories are falling as expected, he said.

Household ownership of munis, which includes direct ownership of individual bonds in brokerage accounts, fee-based advisory accounts and SMAs increased to $1.779 trillion, up 0.3% from Q4 2023 and up 5.6% from Q1 2023.

“The value of municipal bonds held by households rose 0.3% quarter over quarter, better than the 0.3% decline for the market, suggesting that individual investors were likely to be net buyers in the quarter,” said Pat Luby, Mayor. strategy at CreditSights.

The increase in family ownership is mostly attributed to it the growth of SMAssaid market participants.

Some Street participants estimate that SMAs hold as much as $1.5 trillion in munis while others peg it closer to $1 trillion to $1.3 trillion.

However, this growth slowed in the first quarter.

Total market sales fell in the first quarter of 2024, suggesting households and SMAs were less likely to buy, Fabian said.

In the first quarter, there were just over 1 million trades each month, down from 1.5 million trades each month in Q3 2023 and Q4 2023, he said.

While the first quarter was not as big of an accumulation of households, who were waiting to see what would happen after the big gains in the fourth quarter of 2023, it appears that households are buying again in the second quarter, Fabian said.

Despite the slowdown in growth in the first quarter, SMAs are the “dominant demand vector” that traders should recognize when bringing bonds or planning to buy bonds.

“SMAs, as an ‘investor class’, are very powerful in [the muni market] market, as they are in other fixed income markets,” said Peter Block, managing director and head of municipal strategy at Ramirez, noting SMAs are an “effective” vehicle for bond ownership.

Munis have always been a retail market; it’s just the “shape” of the market that changes, he added.

Several regulatory changes have led many investment firms to favor SMAs and managed accounts over mutual funds, ETFs and other vehicles, Block said.

Like SMAs, ETFs have mostly seen increases in ownership.

While ETFs saw a slight 0.2% decline from Q4 2023, they rose 15.7% from Q1 2023 to $122.3 billion. That includes net inflows of $528 million for the quarter, according to the Investment Company Institute.

The ETF market lost some momentum in the first quarter as retail investors turned to households, said Alice Cheng, a municipal credit analyst at Janney.

In addition, some investors temporarily invested in ETFs while waiting to see what happened to market volatility, which was particularly evident last year, she said.

These assets, Cheng said, have become permanent bonds or mutual funds.

Despite this, the year-over-year growth in ETFs “speaks to the growth of the product and the need for it that has been met by the trading community,” said Chris Brigati, senior vice president and director of strategic and fixed planning. income research at SWBC.

He noted that ETF ownership figures may be subject to fluctuations due to the nature of investors.

Activity in the ETF space tends to be more professional investors “doing it from the perspective of making sure they’re in a trade for a short period of time and then getting out of it,” Brigati said.

That’s in contrast to mutual fund investors, who are more “sticky,” he said.

“They tend not to go in one month and out the next, whereas you can easily see that kind of activity in ETFs based on the nature of the professional investor using the product,” he said.

Anecdotally, money has moved from mutual funds to SMAs and ETFs.

“As more investors convert from active strategy mutual funds to ETFs and more recently, SMAs in particular, it sucks some of the air out of mutual funds,” and takes away some of the dollars that mutual funds historically would have kidnapped, said Fabian.

However, Fed data shows that mutual funds slightly increased their municipal holdings quarter-over-quarter and year-over-year.

Mutual funds held 19.1% of the market at $765.6 billion in Q1 2024, up 1.3% from Q4 2023 and 0.1% from Q1 2023. This includes net mutual fund inflows for the quarter of $11.6 billion, according to ICI .

Despite those gains, Block said mutual funds are still down from their highs of $991 billion in 2001.

Both mutual funds and ETFs have their place, although the latter, which continues to grow, represents only a small percentage of the muni market, Block said.

Meanwhile, U.S. banks held $515.3 billion, down 3.1% quarter-on-quarter and 9.1% from Q1 2023. Insurance companies held both life and property and casualty insurance at $402.7 billion. , down 2.8% from Q4 2024 and 8.9% from Q1 2023.

“The market value of bonds owned by insurance companies and banks fell by a greater percentage than the overall market, which makes sense to us,” Luby said.

Since tax exemptions were typically “too rich to make sense for investors subject to the 21% corporate tax rate, we would expect that maturity and called tax exemptions would have been replaced by taxable munis (if ka) or more likely, from IG corporations,” he said.

Assuming a tax rate of 21%, during the quarter, the 10-year Bloomberg BVAL BVAL 10-year tax-exempt yield in the first quarter was between 90 and 125 basis points lower than the after-tax yield of standard single-A corporate yield.

Banks and insurance companies continue to shed muni holdings because of tax loss carryforwards, Block said.

“A lot of these entities don’t necessarily need to buy tax-exempt bonds at certain times, and it becomes kind of an ebb and flow,” he noted.

Brigati argued that banks and insurance companies are not “actively selling munis per se,” but instead are engaged in “a steady stream of repurchases.”

“It’s not like they take the cashback and are trying to put it back into the market; they tend to let it go and then they can go to other products,” he said.

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