Money Managers Still See Muni-Bond Buying Opportunity After Rout
(Bloomberg) — Municipal bonds are looking attractive as they slowly start to recover from the tariff-fueled rout that sent yields soaring earlier this month.
Benchmark yields for state and local US government debt are still elevated compared to where they stood before the historic selloff. For example, the 30-year yield is at 4.5%, about 40 basis points higher than the average yield this year, according to data compiled by Bloomberg.
The current cheapness is a shift from the past several years when muni bonds had stayed relatively expensive, said Troy Willis, co-head and senior portfolio manager of Easterly ROC Municipals.
Longer-dated munis are “still very attractive” compared to US Treasuries, Willis added. The 30-year muni-Treasury ratio, a key measure of relative value, stood at about 95% on April 16 compared to the one-year average of 85%, according to data compiled by Bloomberg.
Investors may be lured back into munis by higher yields and cheaper valuations, which will aid the market as it continues to come back from the steep selloff this month. Tax-exempt municipals also look attractive compared to corporate bonds, JPMorgan Chase & Co. analysts said in a report.
“Valuations have become exceptionally attractive for tax-aware investors,” Pacific Investment Management Co. said in a note. Muni bond yields rank in the 99th percentile compared to the past decade, Pimco’s David Hammer, Paul Reisz, and Jakob Bowling wrote. They said credit quality in the market is strong, adding to their “bullish outlook.”
“Despite concerns over potential federal spending cuts and legislative changes, we believe that the muni bond market remains attractive, and that excess volatility creates more opportunities for active managers,” they wrote.
The Trump administration’s tariffs are unlikely to pressure credit quality in the muni market broadly, Sam Weitzman, product manager at Western Asset Management, said in a note.
“Given our expectation that municipal credit fundamentals are likely to remain sound, we believe this represents an attractive risk-adjusted value opportunity, especially in light of the broader market volatility,” he wrote.
The muni market recouped some of its tariff-fueled losses last week, rallying 1.1%, according to a Bloomberg index. That backdrop will help to bring back buyers, Willis said. “Usually when you have a stable week, then you start to see flows into the market and then it starts to build on itself,” he said.
Willis said he especially likes bonds sold by airports and single-family housing providers, given some offer yields that are close to 5% federally tax-free.
“We remain patient but are taking advantage of higher yields by slowly putting money to work with a focus on investment grade bonds,” BlackRock Inc.’s Patrick Haskell, James Schwartz, and Sean Carney said in a Monday note.
Muni bonds could stay cheap for a bit longer. So far in April, returns are still negative, with the market posting a 1.5% loss. Some of the selling pressure seen recently can be attributed to seasonal factors, with investors tending to sell their holdings to pay for taxes.
“The recovery in munis will be better in May after tax season weakness, as long as Treasury market trading remains normal,” said Bank of America Corp. strategists in a note, adding that the market recovery will likely lag Treasuries in April.
Willis sees continued market swings ahead. Munis fell again Monday morning, driving benchmark yields up after steadying last week. In addition to news around tariffs, tax legislation could drive volatility. Any proposed change to the muni tax-exemption may roil the market, though Willis said he sees any broad changes to muni bonds’ tax-free status as being unlikely to happen.
“We’ve gotten through this first period of volatility,” he said. “We’ll have another few rounds of volatility in the next three to six months.”
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