Salient to Investors:

Brokers and dealers cut their inventory of US muni bonds in Q3 to the least since Q1 2004. Investor demand for munis has faltered. Investors are looking to unload more than $1 billion of the debt, the most in two years.

David Manges at BNY Mellon Capital Market said investors are trying to get out of a very small door here and it’s ugly. Dealers usually hold back on buying munis toward year-end, but the selling in advance of possible tax changes has forced yields higher than expected.

Matt Fabian at Municipal Market Advisors and Peter Hayes at BlackRock said the thinned inventory for brokers and dealers threatens to heighten volatility amid the market’s losses and cost local issuers money. Hayes said a potential fiscal cliff agreement is pushing investors to buy stocks rather than bonds.

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