Municipal bond market analysts expect trading volume in the market to ease in 2023 after more than $3.5 trillion in securities traded hands last year — the biggest surge since the global financial crisis — spurred on by rate hikes and persistent mutual fund outflows.
(Bloomberg) — Municipal bond market analysts expect trading volume in the market to ease in 2023 after more than $3.5 trillion in securities traded hands last year — the biggest surge since the global financial crisis — spurred on by rate hikes and persistent mutual fund outflows.
Average daily trading volume jumped by more than 50% to $14 billion in 2022 compared with volumes a year earlier, according to Municipal Securities Rulemaking Board data analyzed by Bloomberg.
Meanwhile, daily trading volume in the secondary market surpassed $20 billion par seven times last year, a level never breached in 2021, according to MSRB data. The Federal Reserve’s interest rate hikes also brought volatility to the muni market, said Kimberly Olsan, senior vice president of municipal bond trading at FHN.
With more Fed rate hikes and volatility on the horizon, trading volumes in 2023 may again top historical averages, even if they don’t reach last year’s heights. The market swings just may not be as wide and rate hikes not as swift or surprising.
“Big spike in rates and how fast it was surprised a lot of people. We don’t expect that to happen to the same degree this year,” said Mikhail Foux, head of municipal strategy at Barclays Plc.
Last year’s market volatility likely drove investors in and out of positions in a bid to manage interest rate and duration risk, according to Foux. A sharp decline in new bond sales by state and local governments also boosted trading in the secondary market, he said.
James Iselin, a managing director at Neuberger Berman Group LLC, also said that selling pressure should moderate this year.
“With the meaningfully higher absolute yields in munis and the Fed moving into the later innings of their tightening cycle, we would expect fund flows to moderate and selling pressure to lessen to some degree as we move into 2023,” he said.
Last year’s trading was supported by heavy outflows adding volume while buy-side investors were “putting money to work at incredibly cheap yields,” according to Nisha Patel, a managing director for fixed-income portfolio management at Parametric Portfolio Associates.
“There was just a massive opportunity for trading,” said Patel. She expects volume this year to be lower “but not by a significant amount.” Patel sees support for the bond market in 2023 as market participants look for inflows to return and selling pressure from rates to lessen.
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