David Hammer, head of municipal bond portfolio management at Pimco, believes that the current moment is a good opportunity to purchase bonds issued by U.S. states and local governments. These bonds have declined over the past month, with long-term bonds being particularly affected.
After the conflict in the Middle East pushed up oil prices and triggered inflation concerns, the entire fixed-income market experienced a period of volatility. However, municipal bonds faced particular challenges, falling 2.3% in March. According to Bloomberg index data, this marked their worst monthly performance since 2023, with declines exceeding those of U.S. Treasuries.
As a result, the yield on tax-exempt bonds surged relative to U.S. Treasury yields. For 10-year maturities, the ratio stands at approximately 67%, up from around 60% earlier this year, which was the lowest level since 2024.
Hammer’s team is purchasing longer-dated bonds, noting that other investors, such as separately managed accounts, tend to avoid these securities. Longer-dated bonds carry higher interest rate risk, meaning they are more vulnerable to price declines, but they compensate with higher yields compared to short-term bonds.
“We really like taking advantage of this within our portfolios,” said Hammer.
Hammer pointed out that municipal bonds also declined compared to corporate bonds. He noted that at the start of the year, municipal bonds were priced too high, prompting his team to shift toward purchasing Treasuries instead.
Following last month’s decline in municipal bonds, Pimco recently joined companies like AllianceBernstein in identifying value opportunities in municipal bonds.