By Andrew Bary

The municipal bond market went on sale this past week.

Top-rated $(AAA)$ munis with 30-year maturities briefly yielded the same amount as long-term Treasuries on Wednesday, a rare event because of the tax benefits that munis offer. That yield ratio is normally close to 85%.

After a rally on Thursday and selloff on Friday, many high-grade 30-year bonds from issuers like the New York City Municipal Water Finance Authority and the Commonwealth of Massachusetts were yielding close to 5%, against 4.9% for the 30-year Treasury.

A 5% muni yield is equivalent to a 7.7% taxable yield for an investor in the 35% federal tax bracket. The muni advantage is even better for residents of high-tax states like New York and California who hold in-state bonds.

The Bloomberg Municipal Index hit a 4.5% yield during the week, its highest level in 15 years.

"There has been a big adjustment in muni yields this year, and the market is attractively priced," says Dave Hammer, who heads muni portfolio management at Pimco.

One new fear of investors is that the federal government will do away with the muni tax exemption, after an informal Trump adviser broached the topic. Hammer doubts that will happen, given broad bipartisan support for the tax break, which helps states and local governments borrow more cheaply.

Dan Close, the head of municipal bonds at Nuveen, cites several factors that have contributed to the current volatility.

The muni sector had a weak first quarter as issuance picked up and market conditions worsened in April due to seasonal outflows from muni funds as investors raised cash to pay income taxes. Then came the dislocations in the Treasury market and some exchange-traded fund outflows. Wall Street bond dealers are reluctant to hold munis and absorb selling due to tough bank capital regulations and hedging challenges.

The muni market, Close said, has been supported by institutional "crossover buyers" that bought munis because of their unusual appeal relative to U.S. Treasuries.

There are many ways to invest, including open-end funds like Pimco Municipal Bond (ticker: PMLAX), Vanguard Intermediate-Term Tax-Exempt (VWITX), or Nuveen High Yield Municipal Bond (NHMRX), with the last now yielding about 5.6%. Good managers can add value, but there are many ETFs, including the $40 billion iShares National Muni Bond $(MUB)$.

Brokerage firms don't sell as many individual muni bonds to investors as they did a decade or two ago due to compliance issues and a lack of bond savvy among many financial advisors. But some retail buyers still like to hold actual bonds, clip coupons, and avoid management fees.

Many investors haven't bothered to buy munis in recent years due to low rates. But 5% yields could change the equation.

Write to Andrew Bary at andrew.bary@barrons.com

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April 12, 2025 15:02 ET (19:02 GMT)

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