Municipal bonds are suddenly back in favor as investors search for a steadier place to park capital during a choppier market stretch. Funds focused on state and local government debt attracted roughly $22.3 billion in net inflows during the first four months of the year, the strongest January-to-April period since 2021, according to LSEG Lipper Global Fund Flows. April extended the streak to four straight months of inflows and also delivered the muni market’s best April performance in more than a decade, as investors moved back into the asset class after war-fueled volatility shook broader markets.
The demand story is being driven by more than just caution. The yield-to-worst on the muni index stands at 3.69%, which translates into a taxable equivalent yield of just over 6%, according to Jason Appleson, head of municipal bonds at PGIM Fixed Income. That compares with US 10-year Treasuries yielding around 4.4%, giving munis a potentially attractive income profile for investors looking beyond equities. Dora Lee, director of research for Belle Haven Investments, said that even during March’s volatility, investors saw munis as both a safe haven and a source of attractive yield. That appetite has also helped the market digest heavy issuance, with borrowers selling roughly $183 billion of debt this year, up about 7% from the same period last year, and many offerings being absorbed easily or even oversubscribed.
For investors, the bigger signal could be that munis are benefiting from two forces at once: a desire to reduce risk and a search for yield. The S&P 500’s SPY recent climb to all-time highs followed a volatile stretch tied to surging oil prices and concerns related to the Iran war, while Chris Brigati, chief investment officer at SWBC Investment Services, said worries around AI and whether equities can keep moving higher may be pushing some investors to pull chips off the equity table and move into fixed income and municipals. The risk is that another round of war-related volatility or higher oil prices could possibly pressure demand if inflation fears build again, which would be broadly unfavorable for fixed income markets. Still, Lee said she believes there is plenty of cash on the sidelines to support the muni market if weakness hits, as many investors are either increasing exposure to the asset class or entering it for the first time.