· We believe this environment presents a compelling opportunity for investors to capture higher yields with taxable-equivalent levels not seen since 2023. Even after rebounding following the steep three-day selloff, municipal yields remain an average of 49 basis points higher than the levels on March 1st.
· This recent dislocation also underscores the structural advantage of Separately Managed Accounts (SMAs), which allow investors to maintain exposure without being subject to forced selling.
· Periods like this often represent a potential entry point and opportunity to lock in attractive yield levels as part of a longer-term fixed income allocation.
· Initial Yield Spike in the Municipal Market: Following Liberation Day announcements, municipal bonds experienced a nearly 100 basis point yield spike.
· Flight to Liquidity and Tax Bills: Market volatility was driven by three primary factors:
1. Large outflows from mutual funds and ETF groups seeking liquidity
2. Elevated year-to-date issuance
3. Seasonal sell for April 15th tax payments
· Tariff Pause and Rally: The April 9th announcement of a 90-day tariff pause prompted a sharp turnaround, with municipal yields rallying by an average of 51 basis points.
SUMMARY
As markets responded to President Trump’s April 2nd executive order on tariffs, municipals were not immune to the resulting volatility. Initially, tax-exempt yields followed Treasuries lower in a flight-to-quality bid following the Liberation Day announcement. However, that initial rally quickly gave way to large-scale retail selling, primarily from municipal mutual funds and ETF products, as investors sought liquidity. Fund managers responded by flooding the secondary market with bid wanteds to meet redemption requests, culminating in a record number of municipal securities out for bid on April 8th.
This wave of liquidations coincided with the seasonally weak period around tax time, when investors tend to shed muni holdings to pay tax liabilities while maturity reinvestment demand slows. Additionally, the market continues to digest elevated primary supply, with issuance up 15% year-over-year from last year's record-setting level of $513 billion and showing no signs of slowing down. As a result, the AAA municipal scale saw a dramatic adjustment higher in yield—rising nearly 100 basis points over the course of just three trading sessions. This marked the most significant three-day yield increase outside of the COVID-19 pandemic.
Matthew Riggle
Co-Director of Research
Source: Municipal Market Data (MMD)
However, the market experienced a sharp reversal following the April 9th announcement of a 90-day pause on the higher, country-specific tariffs for most nations. This news prompted immediate interest from crossover buyers such as insurance companies and banks, who had largely been sitting on the sidelines. This turnaround in demand led to a substantial rally in tax-exempt bonds to close on the 9th and into the time of writing on April 10th.
Source: Municipal Market Data (MMD), US Treasury
We believe this environment presents a compelling opportunity for investors to capture higher yields with taxable-equivalent levels not seen since 2023. Even after rebounding following the steep three-day selloff, municipal yields remain an average of 49 basis points higher than the levels on March 1st. This recent dislocation also underscores the structural advantage of Separately Managed Accounts (SMAs), which allow investors to maintain exposure without being subject to forced selling. As fund companies face liquidation requests and must sell into a stressed market, leading to a feedback loop of more negative performance and more outflows, SMA investors can hold through the volatility. For investors with available cash, periods like this often represent a potential entry point and opportunity to lock in attractive yield levels as part of a longer-term fixed income allocation.
APA-2504-16