Investors are continuing their flight from mutual fund investments, as individual investors and tax-exempt exchange traded funds take up more of the market share.

That’s according to a recent mid-year market update from the Municipal Securities Rulemaking Board.

“The supply/demand equation changed rapidly, as mutual funds, the largest buyer of municipal bonds, especially in the long end, became significant sellers to meet unprecedented outflows in the first half of the year ($88 billion through June 29),” the report said.

Individual investors stepped in to tighten the slack, accounting for the large uptick in trading volume in Q2.

“Individual investors can still be a driving force in the market,” John Bagley, chief market structure officer at the MSRB said.

The MSRB has tracked three consecutive months of a million plus trades, which according to Bagley, is indicative of individual investors.

“As benchmark rates were reaching levels not seen since 2013, trading volumes for municipal bonds reached record levels, with the daily average number of trades in May reaching 58,000, almost double the 29,683 daily average in 2021,” the report said.

The 5.8 million trades of fixed-rate securities in 2022 was 49% higher than that of 2021, and reached a peak in May with $260 billion, more than double the $124 billion traded in May 2021.

But the largest shift might be in investor appetite for tax-exempt exchange-traded funds, with activity rising 410% in the first half of 2022. Taxable issuance fell to 15% of all bond issuances, down from 27% in 2020 and 2021.

Issuances in general were also down as compared with 2021, totalling $200.5 billion in the first half of 2022, down 10% from the $222.6 billion issued in the first half of 2021. Average monthly issuance fell to $33 billion from $38 billion in the first six months of last year.

But tax-exempt issuance was almost unchanged when compared with 2020 and 2021 levels, seeing a 1% uptick.

“Monthly volume for the past two calendar years averaged 27% of the overall market,” the report said. “That is a dramatic contrast with the 15% monthly average for the first half of 2022 and the 7.8% level for June 2022.”

In contrast to previous years, higher interest rates in the first half of 2022 “restricted the ability to refund many deals and significantly raised costs to fund projects, particularly on a taxable debt basis,” the report said. Refunding new issuances fell nearly 50% to $25.8 billion

The board expects many of these trends to continue on for the second half of the year, as it will be “largely influenced by many of the same factors that impacted supply and demand in the first half, in particular, continued inflationary pressures, aggressive Fed tightening and concerns about a possible recession,” the report concluded.