In a bleak year for fixed-income markets, US municipal bonds issued by state and local governments have stood out as being among the least-bad assets to own. The outperformance is now looking more tenuous.
The $4tn market for “munis”, often bought by individual investors attracted to their yields and tax advantages, has fallen by 13 per cent this year, according to the ICE BofA municipal bond index. The decline has been sharp for the muni market but less severe than benchmarks for Treasury bonds, investment-grade corporate debt or US equities.
Municipalities’ fiscal balances are still in good shape thanks to stimuli they received in the Covid-19 crisis, but the returns on their bonds reflect more than that. Investors and strategists warn that munis’ relative strength also reflects a dramatic slowdown in issuance and mispricing in the market.