In the video below, Wealth Enhancement’s Deputy Chief Investment Officer Doug Huber focuses on the “outsized volatility” in municipal bond markets. Driven by concerns over market volatility linked to trade tensions, seasonal selling, and a desire for some investors to move back into equity markets, the municipal markets are seeing wider spreads than normal. Watch to learn more.
If you have questions about how the current economy and market environment could affect your financial plan, reach out to a Wealth Enhancement advisor today.
TRANSCRIPT:
Hello everyone and welcome to this week's seven Market Movers webinar. My name is Doug Huber and I'm the Deputy Chief Investment Officer of Wealth Enhancement.
This week has been another volatile week for equity markets as continued back and forth on trade policy drives the narrative of market participants. We've seen a small recovery in equity market prices as the rhetoric on tariffs have softened and the concerns around our central bank's independence have abated, but it is still clear that until we get resolution on the magnitude of tariffs and the number of trading partners affected by the Trump administration's tariff policies, the market will continue to gyrate based on these headlines.
Instead of focusing on equity markets or the economy as we have in prior videos, I thought today would be a good day to address an area of the market that a lot of our clients have investments in, and that is municipal bonds. As a reminder, municipal bonds are debt securities issued by a state, city, or county to finance public projects like schools, highways, and sewer systems and they're generally tax advantaged in nature.
Over the last week, we've seen outsized volatility or price movements in this sector, and we thought it made sense to give an update on what has been impacting the market. The recent volatility in what normally is a very low volatility area, of bonds has been driven by two high-level factors: market technical, or what we could call trading action, and fundamental concerns.
On the technical side, many investors are selling off their municipal bond ETFs and mutual funds. This is primarily driven by concerns over market volatility linked to trade tensions, the need to fund their individual tax payments, April fifteenth was just a week ago, and that often leads to some selling, and potentially desire to shift some of their investments back into the equity market as we've seen kind of equity market valuations come down.
In addition to and somewhat driven by that individual selling, those municipal bonds, ETFs, and mutual funds are responding to those redemptions by selling large amounts of their underlying bonds, particularly the shorter duration or shorter-term bonds, and that has impacts on the entire market. This creates a supply demand dynamic where there are currently more sellers than buyers in the market, and that leads to what we call wider spreads or a larger bid-ask spread between who's buying and who's selling, kind of driving prices down.
From the fundamental side of things, investors are growing concerned with the potential impacts of less government subsidies to local municipalities, and they're trying to figure out or evaluate what the impact of less federal spending would mean to the creditworthiness of state and local borrowers.
For now it appears the volatility has a large part to do with these selling pressures related to the uncertainty, investor sentiment, maybe some of the one-off tax payments. However, it's going to be really important to watch the federal government's budget decisions as it relates to state and local spending.
That said, if we take a step back today, kind of post a little bit of a sell off, municipal yields are actually at their highest level since 2023, with the Bloomberg municipal bond index offering a yield to worst of almost 4.2% as of yesterday.
The taxable equivalent yield or a direct comparison of what a similar taxable bond would need to yield to investors in the highest federal tax bracket is close to 7%. I mean, think about that. That's quite a quite a large spread, and so they are quite attractive today on a price basis or on a yield basis.
Muni bonds also continue to look attractive relative to the longer maturity treasury bonds. So oftentimes, we'll talk about the muni bond treasury ratio. So, for instance, the 30-year AAA muni bond to treasury ratio is at 95% today, which is above the five-year average ratio of 92%. This measure simply measures the attractiveness of a muni bond yield to that of a US Treasury bond of the same maturity.
And while typically this ratio is always less than a hundred percent as munis get the benefit of being tax exempt, market participants generally view munis as cheap as that approaches that 100% mark. And so, at 95%, we're kinda getting there. In addition to the attractive muni to treasury ratio, the municipal yield curve remains steep, unlike the US Treasury curve, and what that indicates is that investors are potentially receiving an attractive premium to kind of move farther away from or farther out the curve as we might say, move from an intermediate duration to a longer duration in high quality municipal bonds.
And so, despite the more recent price fluctuations, we believe the situation is temporary.
Municipal credit fundamentals do remain strong today, but it's important that that is subject to change. We need to continue to monitor the situation but feel it's a prudent time to stay invested given the relative attractiveness today.
As always, please reach out to your adviser with any questions, and I want to thank you for tuning in to another week of Wealth Enhancement's seven market mover video series. We look forward to seeing you next week with more market and economic updates.
This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances. Investing involves risk, including possible loss of principal.
2025-7600
