This bond bear market has taken down Munis hard. Yields on Munis (measured by MUB) are around 2.45%, which is ~3.5% tax-free on a 4.25yr duration. Higher Yield Muni funds are around 4% yields (5.7% TEY).



Market Recap

Year to date, 10yr AAA Munis have risen from 1.04% to 2.46%. Even after the move they remain 33bps below the 6- year high of 2.79% set during March of 2020 (liquidity crunch). Concerns over inflation and the Fed raising rates have sent the value of all fixed income securities lower this year.



Over the longer run we expect support in the municipal sector from federal infrastructure spending, slightly lower supply, and investor demand for tax free income.

As a relative value indicator, we measure the AAA Muni to Treasury ratio (AAA Muni Yield (pre-tax benefit)/ Treasury Yield). The current ratio sits at 89% as of mid-April which is in line with its 5-year average. The ratio started the year at 64% so using this quick reference, relative to recent history, municipal bonds are attractive. For a fun fact, the ratio was at 369% during the March 2020 unraveling.

We prefer the 2–10 year part of the Muni curve (max steepness) meshed with higher coupon offerings (less rate sensitivity). We also prefer A rated or higher securities with either an essential service or general obligation backing (higher quality/ higher likelihood of gov’t backing).





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Municipal bonds can be significantly affected by political and economic changes, including inflation, as well as uncertainties in the municipal market related to taxation, legislative changes, or the rights or municipal security holders. Municipal bonds have varying levels of sensitivity to changes in interest rates. Interest rate risk is generally lower for shorter-term municipal bonds and higher for long term municipal bonds.

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