April was a tough month for municipal bonds, marking their worst performance since September. According to Bloomberg indexes, US state and local debt is expected to show a loss of 1.24% for the month.
This downturn is part of a larger sell-off in Treasury and other debt markets, fueled by economic data suggesting that inflation pressures are sticking around, rather than easing up as hoped.
Wall Street firms and investors have adjusted their expectations accordingly, now thinking that the Federal Reserve will keep borrowing costs at their highest level in over two decades during its next meeting.
Despite the tax-exempt status of state and local securities, which usually attracts investors, the muni market has been affected by changing demand from mutual funds.
Also, borrowing by municipalities has shot up, with state and local debt sales increasing by more than 20% year-over-year to about $39.5 billion in April.
Kathleen McNamara, a senior municipal strategist at UBS Global Wealth Management, pointed out that the increase in supply is a big challenge for the market.
Even though there’s been an overall downturn, municipal bonds have fared better compared to US Treasuries, which are set to finish April with a 2% drop.
Paul Malloy, who heads municipal bonds at Vanguard Group Inc., pointed out that when you look at it relatively, munis haven’t had it as tough as the broader fixed-income market this month.
He’s still upbeat about muni yields being attractive for investors, noting that the selloff this year has pushed the yield on triple-A, 10-year municipals to nearly 2.8%, up by about 50 basis points from the start of the year.
Despite the challenging April for munis, experts see potential for improving things in the coming months.
Barclays strategists, led by Mikhail Foux, think that technical factors during the summer, like slower bond sales and increased principal and interest payments to investors, could lift the muni market.
Similarly, Bank of America Corp. strategists expect a market turnaround in May, with conditions favoring the market in the first week of the month.
