Munis show value after march sell-off as yields rise

Municipal bonds and related exchange-traded funds fell in March as the conflict in Iran coincided with a jump in U.S. Treasury yields. Ten-year AAA municipal yields climbed about 60 basis points to 3.12%, while 30-year AAA yields rose about 30 basis points to 4.47%. ETFs that track municipal debt mirrored the sector’s losses.

The gap between municipal yields and comparable Treasury yields widened across the curve. Muni-to-Treasury ratios expanded by roughly 1 to 8 percentage points depending on maturity, driving a repricing across the market.

BlackRock wrote that the repricing has meaningfully improved valuations and highlighted higher yields and wider ratios as factors that could attract income-focused investors who account for tax benefits.

Market participants and advisors describe the credit profile of many municipal issuers as generally strong. Technical conditions are shifting as the market moves into the summer period: reinvestment income from maturities, calls and coupons often equals or exceeds new issuance from June through August, which can reduce net new supply.

BlackRock noted that over the past five years municipal bonds produced average total returns of about 0.80% in the summer months, led by June and July.

Historical data cited by BlackRock show that municipal bonds have recovered quickly after short-lived, event-driven sell-offs. Since 2020, across five such episodes, the asset class recaptured roughly half of its drawdown within about five trading sessions on average.

Advisors considering allocations will watch yield levels, fund flows and the pace of new issuance. Higher muni-to-Treasury ratios raise the tax-adjusted yield appeal for investors in higher tax brackets. Exchange-traded muni funds offer a liquid, diversified way to gain exposure but reflected the sector’s March losses.

Near-term performance will depend on the path of Treasury yields, geopolitical developments and issuance patterns over the summer.