Insurance companies have reduced their collective holdings by almost $42 billion or 9.5%, according to Federal Reserve data.
Together, banks and insurance companies reduced their holdings by 10%, or $102 billion in 2023, the Municipal Securities Rulemaking Board's 2023
"Insurance companies likely reduced their holdings because of significant losses incurred and the relative attractiveness of other taxable fixed income assets compared with tax-exempt municipal bonds," the MSRB said. "In 2023, net outflows from mutual funds and the significant reduction in holdings by banks and insurance companies created a significant challenge to institutional demand for municipal bonds."
Tax-exempt mutual funds saw positive inflows through late July 2023, but starting the week of Aug. 2, they experienced 20 straight weeks of outflows totalling more than $23 billion. Unlike mutual funds, tax-exempt ETFs saw positive net inflows of $15 billion for the year.
New issue volume continued to sink below the $400 billion mark, reaching $379 billion in 2023, a 3% reduction compared with 2022 and down 7% compared with 2021. Taxable debt accounted for 10% of the new issue market in 2023, down from 14% in 2022 and 25% in 2021.
But trade count in 2023 continued to rise to reach 12.8 million trades reported to the MSRB, up 3% from 2022, and a major comeback from 7.5 million trades in 2021 that was marked by low yields and low volatility. The MSRB singles out the fourth quarter of 2023 as individually significant, as average daily trade count rose by over 40% compared to the first nine months of the year. Par amount traded in 2023 was $2.25 trillion, down 11% from the record levels reached in 2022.
"One trend we continue to see is customer sell trades and inter-dealer trades increasing their overall share of trades while the share of customer buy trades is declining," the MSRB said. Customer buys accounted for 50% of all trades in 2010 but have fallen to 36% of all trades in 2023, and customer sell trades have increased to 25% in 2023, up from 19% in 2010. Inter-dealer trades have increased to 39% in 2023, from 31% in 2010.
Alternative trading systems also continue to increase their share of trades, representing 14% of all trades in 2023 compared with 12.6% in 2022.
The MSRB notes that for 2024, demand for munis will be determined by a few questions. Will tax exempt mutual funds see a return to net inflows? Will banks and insurance companies continue to reduce their holdings for municipal bonds? And will demand from individual investors continue with yields now dramatically lower than the highs seen in late October?
