Back in business

Question: Why might municipal bonds see heightened demand in 2023?

RJ Gallo: A lot of muni bond buyers are very yield sensitive. A number of muni buyers want to buy a high-quality bond and put it away, they're not necessarily looking to trade in and out of their securities. Those buyers became very attracted to munis in the latter quarter, the end of last year, and then into the beginning of this year because they now are seeing yields near the highest levels of over the last 10 years or so. The yield-oriented buyer thus perked up, started stepping into the markets and started buying bonds. I think there's another factor that's contributing to strong muni demand as well. Number one, munis are a very high-quality asset class. The average credit quality of the muni index is AA rated, and despite a few isolated problems in the municipal market over the years, the default risk is very, very low. That makes municipal bonds a high-quality asset class as we head into a potential recession, that's a good place to park your money without worrying about credit risk, and as a result, that as well as the higher yields have helped to support muni demand in the last three to six months.