Investors are piling into municipal bonds at the fastest rate in five years, drawn by attractive yields and the promise of a safe harbor from recent market volatility.
Net inflows into funds focused on state and local government debt totaled roughly $22.3 billion in the first four months of the year, the most for the period since 2021, according to data from LSEG Lipper Global Fund Flows.
April marked the fourth straight month of inflows, as well as the muni market’s best performance for that month in over a decade, as investors found their footing following a stretch of war-fueled market turbulence.
“Even when there was a lot of volatility in March, the investor base saw our asset class as a safe haven, and on top of that as a place of attractive yield,” said Dora Lee, director of research for Belle Haven Investments. “Our calendar hasn’t really let up despite the volatility and it is speaking to this very strong investor demand that does not seem to be abating.”
The yield-to-worst on the muni index stands at 3.69%, which is a taxable equivalent yield of just over 6%, according to Jason Appleson, head of municipal bonds at PGIM Fixed Income. By comparison, US 10-year Treasuries yield around 4.4%.
At the same time, munis have been comparatively placid compared to other markets, such as stocks: the S&P 500’s recent run to all-time highs follows a volatile stretch spurred by surging oil prices and other concerns related to the Iran war. The asset class is also a destination for those worried that equities will not be able to sustain their record run, said Chris Brigati, chief investment officer at SWBC Investment Services.
“There are some concerns about AI and the ability for the market to keep driving higher,” he said. “You can see investors pulling some chips off the equity table and putting it into fixed income and municipals with relatively attractive absolute levels.”
The demand for munis can also be seen in buyers’ hunger for new deals. Borrowers have sold roughly $183 billion of debt this year, up about 7% from the same time period last year. The bulk of those offerings have been easily absorbed or even oversubscribed, market participants said.
Of course, plenty of factors could crimp investors’ appetite for muni bonds despite the strong start to the year. The market hasn’t been immune to war-related volatility, and a fresh bout of gyrations could see buyers pull back. Investors could also get cold feet if climbing oil prices continue stoking fears of an inflationary rebound — a broadly unfavorable development for fixed income markets.
But Lee, of Belle Haven Investments, is confident that there’s plenty of cash on the sidelines to support the market if weakness hits.
Given the turbulence and the current attractive yield environment, “a lot of investors are either choosing to increase their exposure to this asset class or to enter in for the first time,” she said.
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