Municipal Bonds Could Provide Stability in an Uncertain Market

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The failure of two tech-focused lenders in March rippled through fixed-income markets, broadly shifting bond yields down across the board. The municipal bond market is no exception, with yields falling from above 4.0% in October 2022 to a yield of 3.4% as of April 28, 2023. While we do believe these events present some marginal risks for investors, we remain constructive on the municipal bond market, especially as the risk of recession grows.

Key takeaways:

  • Banks own a significant portion of the muni market. One potential risk of the growing stress on the financial system is the possibility that banks will begin to sell off their municipal bond holdings to meet their liquidity needs.
  • The impact of tightening lending standards: Currently, banks commonly engage in direct lending to municipalities, bypassing public markets. If banks tighten their lending standards, restricting issuers’ ability to access direct loans, this too could cause an uptick in supply for the municipal bond market.
  • Municipal bonds have historically performed well after periods of stress. Learn why.
  • Historically, municipal bond ratings tend to be more stable than corporates. Learn why.

 

MF2942102,  6/23

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