Q2-3 2022 Municipal Bond Market Update

    The municipal bond market continued its downward trajectory in the second quarter, resulting in the worst first half in the history of the bond market, which dates to 1812.

    The rising fear of inflation and the uncertainty of how far the Federal Reserve needs to hike short-term interest rates injected massive uncertainty and fear, which is always a bad combination for fixed income markets.

    The municipal bond market, which usually outperforms in a rising rate environment, was hit even more than taxable markets as investors pulled out historic amounts of cash. This led to a negative return for the Fund of -5.38% versus -2.94% for the Bloomberg Municipal Bond Index, -6.59% for the Bloomberg Long Term Municipal Index, and -7.24% for the First Trust Municipal Closed End Fund Index.

    Market Overview

    The municipal market was decidedly negative for the second quarter which led to a significantly oversold condition.

    Retail investors were selling anything they could in a relatively illiquid market, which caused prices to fall precipitously. The selling led to higher tax-exempt yields compared to their taxable counterparts and offered savvy buyers a discount on municipal bonds as too much negativity was priced into the market.

    Municipal Bond Market Outlook

    Looking forward, we expect the Federal Reserve to continue hiking short-term interest rates to fight inflation. Unfortunately, we also believe that due to inflation and a relatively aggressive Federal Reserve, the economy is headed for a slow down if not an outright recession.

    Economic indicators are starting to come in weaker and economists are raising the chances of a recession every day. If this scenario does come to fruition and the economy weakens significantly or even goes into a recession, we would expect long-term yields to fall and for an inversion in the yield curve to occur.

    The municipal bond market should react in a similar fashion and could outperform the taxable market due to significant negativity already priced into tax-exempt bonds.


    Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.

    Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.

    Related Categories

    Bond Markets Municipal Markets

    Roberto Roffo

    Roberto Roffo is a Managing Director and Lead Portfolio Manager for SWBC Investment Company. He has extensive experience in managing many types of funds and strategies and over his career has been part of teams that have been responsible for raising over $50 Billion in tax-exempt and taxable fixed income assets.

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