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The U.S. municipal bond market has seen its worst beginning to a new year since 2011, with the S&P Municipal Bond Index losing 1.1 percent in the first 20 days of this year.
Muni bond funds took in $830 million in new investment this year through 19 January, compared to $6.1 billion for the same period a year ago.
The muni market has turned sharply after seeing record stability and near-record high prices last year.
When the U.S. Federal Reserve indicated it might raise short-term interest rates sooner than expected, muni yields rose along with those for treasury securities, with the rate on AAA-rated munis jumping from 1.03 percent on 30 December to 1.28 on 20 January, according to data service Refinitiv.
Bond yields rise as prices fall.
Conservative investors tend to like munis because local governments issue them to fund infrastructure projects and the interest the bonds pay usually is exempt from state and federal tax.
However, existing bonds with lower interest rates are likely to find few buyers in the secondary market during a time of inflation and rising rates.
Those conditions also increase costs for municipalities for everything from asphalt to office supplies, as well as driving up the cost of borrowing. Those factors are forcing them to pinch pennies and issue less debt.
State and local governments borrowed only $9.2 billion during the first 20 days of this year, the smallest amount in four years.
As The Wall Street Journal noted, the interest on those bonds has shot up: the city of Greenwich, Conn., issued one-year bonds earlier this month carrying .21 percent interest, contrasted with .12 percent a year earlier.
Purchases of munis also might be fewer this year because households are expected to save less in coming months, due to inflation and higher interest rates, compared to the COVID era when savings accounts ballooned as households had income but little to spend it on.
In addition, investors anticipating interest rate hikes have already shifted much of their wealth from riskier investments to bonds, so there is likely to be less money making that shift now, analysts told the WSJ.
Making matters worse for munis, many have teetering credit ratings: localities often had to spend big on health care, medical supplies, and other unexpected costs during the COVID crisis and borrowed to meet those needs.
Also, federal supports for cities and towns have now ended, leaving municipalities to fend for themselves financially.
TREND FORECAST: The growing permanence of remote work is robbing office buildings of their value. As their value sinks, the amount of property tax a city can charge the owner also falls.
Cities will have less revenue, which could push some to issue additional municipal bonds.
However, considering that moronic politicians with long track records of failure are in charge, cities will not place a greater priority on cutting spending during a time of inflation and economic uncertainty. Thus, rather than cut back, they will tax in all ways they can invent.