Municipal bond investors who’ve been frozen on the sidelines seem to be thawing as the stock market gyrates and muni bond yields rise.

These investors, who’ve sacrificed untold tax-free income over the years, chose to stash their cash and wait for interest rates to rise instead of investing all along.

Now they’ve been relieved (at least temporarily) of their main task – trying to outguess the Fed – and are streaming back into the market as the central bank has explicitly stated its intention to raise rates.

It’s been a long and costly wait for these folks.

Rise in muni bond yields thaws frozen investors

Individual investors

Today, headlines abound that paint an encouraging picture: “It’s time to buy,” reads one. Municipals are “buys again,” exclaims another. “Retail investors tiptoe back into muni bonds as yields beckon,” announces a third.

Investors are taking heed.

In late April, the number of daily trades exceeded 60,000, a level not seen since the pandemic-fueled selloff two years ago, according to Bloomberg. In March, daily trades averaged about 42,600.

Perhaps, as one strategist was quoted as saying, it’s a case of “Fed exhaustion.”

For months we’ve heard a constant drumbeat from the Fed that its mission is to hike rates. Investors got the message, markets responded and buyers are now seizing the resulting opportunities.

Rising muni bond yields

Aside from an early part of the pandemic (“Coronavirus Fallout and the Municipal Bond Market”), yields are the highest in several years.

Normally, municipal bonds trade at about 85% of Treasuries. They’re currently at a breathtaking 200%.

Yields on some municipal bonds are reaching more than 4.00%, the highest since late 2016 and the equivalent of 6.35% on a taxable security, according to Bloomberg.

In fact, 20-year AA-rated munis yield about the same as fully taxable corporate bonds, at approximately 4.00%.

Equally compelling is that higher yields, not credit problems, are causing the price declines.

Sidelined no more

We certainly applaud investors who are jumping back into the market, but bemoan the futility of those who’ve tried for years to read the interest-rate tea leaves.

Experienced investors, who understand how to accomplish their fixed-income goals and achieve long-term success, never stopped investing when cash was available.

They, too, are taking advantage of higher yields. The difference is, they’ve been reaping a steady stream of tax-free income the whole time.

James A. Klotz is the President of FMSbonds, Inc. Email the Author05/05/2022