Remember a month ago, when investors bailed on stocks and bonds and nothing seemed like a good idea?

Well, it turns out not all investors were sellers. While many were heading for the exits, astute municipal bond investors saw opportunity. In fact, when the selloff frenzy reached its peak, there was a net increase in sales.

How could that be?

Sentiment changed, but bonds didn’t

A week before the height of the selloff, we published an article, “Coronavirus Fallout and the Municipal Bond Market,” describing a herd mentality that presented a rare but lucrative opportunity for investors.

We identified the current mood as resembling the prevailing sentiment more than a decade ago, during the Great Recession, when investors sold indiscriminately.

Today, similar to 2008, the credit quality of munis didn’t change but the crowd’s behavior did. Prices dropped, yields soared and savvy muni investors pounced.

On March 20, the height of the current selloff, purchases of certain municipal bonds exceeded sales by $920 million, according to Bloomberg.

These were state and local government munis purchased in blocks of $1 million or less. They are considered representative of bonds bought by individual investors.

“It was almost off the charts in terms of retail net buying,” a Citigroup executive told Bloomberg. “We’ve seen it in each of the past crises, as bond funds and other investors sell, munis get cheaper, and eventually high net worth comes in opportunistically.”

To see value, look for it

The scale behind the price drop was remarkable: During two weeks in March, investors pulled almost $40 billion out of municipal bond mutual funds. Consequently, yields soared.

Again, the only thing that changed was the attitude of many investors, a signal that unusual value was available in the market.

Veteran muni investors didn’t flinch at the downturn. They are immune to “headline risk,” the drumbeat of bad news based on emotion. Their focus is on generating a steady stream of tax-free income and the quality of their holdings, not their market price, which can often fluctuate.

They don’t wait for momentary market anomalies, though they take advantage of them when they’re available.

They know there’s always value in the market, have the insight to spot it and when cash is available, these muni investors pounce.

James A. Klotz is the President of FMSbonds, Inc. Email the Author04/20/2020