Municipal bonds have a reputation for being boring.

Apparently, no one told the bond market.

Although we’ve recently written extensively about today’s eye-catching municipal bond yields, (e.g. “Muni Yields Soar: Waiting for More?”), there’s another, less obvious but revealing side to the story: The extraordinary market activity surrounding those yields.

Consider the numbers.

Market in overdrive

In the third quarter of this year, a record 5.2 million municipal bond trades were made, including 2.1 million in September alone, 24% above the previous monthly record, according to the Municipal Securities Rulemaking Board. New bond issuance reached $164 billion during the quarter, putting the market on pace for another record year.

Meanwhile, “benchmark tax-exempt yields soared in the quarter and reached the highest levels since the credit crisis in 2007-2008, likely contributing to the record trading volumes,” the MSRB reported.

Together, these developments have made for an unusually active few months in the normally staid municipal bond market.

Behind the activity

Behind the raft of activity are several factors.

First, municipalities are borrowing heavily to finance infrastructure projects. Construction costs have climbed and federal pandemic assistance has largely run its course, factors analysts say have contributed to increased issuance.

Further, changing interest-rate expectations have caused bond prices to fluctuate sharply. As Baird Asset Management noted in a recent commentary, the Federal Reserve’s September rate hike and rising Treasury yields dampened municipal bond prices.

Declining prices have encouraged some investors to sell bonds and realize losses for tax purposes, replacing them with other bonds. Analysts say that has contributed to heavy trading, bringing more existing bonds into the market for prospective buyers.

For buyers, it’s been a boon.

More bonds coming to market means a broader selection of issuers, maturities, coupons and credit qualities. Meanwhile increased selling can create pricing differences among existing bonds, allowing investors to find attractive values.

Volatility and yields

And then there’s the longer-term perspective.

“Municipal yields have been higher than today’s level on only 1% of trading days since 2007,” wrote BlackRock’s Patrick Haskell, in an online commentary. “The last comparable period, in December 2008, was followed by a 17.1% 12-month return for the Bloomberg Municipal Bond Index.”

Investors, he noted, don’t need a crystal ball to flourish.

“Today’s market doesn’t require investors to get the rate call exactly right. Elevated tax-exempt yields are already doing much of the work, creating opportunities to build core exposure, seek greater income potential, or extend duration.”

He thinks investors should focus on what matters: “Volatility gets the headlines. Yields tell the story.”

We agree.

No one can predict where the market is headed, and it’s foolish to try.

But with conditions that are anything but boring, long-term municipal bond investors have a compelling opportunity right now to lock in historically attractive tax-exempt yields and keep their interest clock ticking.