FINDING VALUE AMONG THE MUNI MARKET MALAISE
Lawrence Gillum, CFA, Chief Fixed Income Strategist, LPL Financial
The municipal bond market faced significant volatility in April, driven by spillovers from a turbulent Treasury market. Treasury yields were pressured higher by rising inflation expectations; the Federal Reserve’s cautious policy stance, reduced foreign demand; hedge fund deleveraging, portfolio shifts toward cash, and structural illiquidity. These dynamics reverberated across fixed income markets, with municipals experiencing pronounced dislocations due to their fragmented market structure and liquidity constraints. High-grade (HG) municipal yields fluctuated sharply, with AAA benchmark yields traversing an 85-basis point (bps) range in long-end tenors. By month-end, yields ultimately rose by double-digit basis points across the muni curve. But with the dust mostly settled, in our view, value has returned to the muni market and not just for traditional muni buyers. Starting yields, which represent the best expectation of future returns, are above longer-term averages and are equally attractive relative to most taxable alternatives.