INSIGHTS

On March 30, 2026

AAM Viewpoints — Market Volatility vs. Municipal Stability

The municipal (“muni”) bond market has been a boring place to operate during the market volatility of the past few weeks, and that has been a wonderful thing! Boring means predictable and predictable means that munis have the potential to be a haven for investors looking for stability in a less stable world. As The Bond Buyer article that our Portfolio Manager J.B. Golden was quoted in said, “[The] war isn’t spooking muni buyers yet,” and as time goes on, it has become clear that very little spooks muni buyers anymore.

Every morning as I am reading through the news over my coffee, it’s been a tale of two completely different markets. We are seeing constant news on the war, politics, interest rate volatility, real estate declines and major changes in technological advancement. It’s a crazy world out there and only seems to be getting crazier by the day. On the other hand, reading municipal bond news for just five or 10 minutes a day has been known to cause feelings of calmness and serenity! Every day we are overstimulated by news, unexpected policy changes and new information and as an investor it can be very tough to keep up. The predictability of a municipal investment is very attractive to investors dealing with everything going on lately, and as we will see, investors are already moving increasing amounts of cash into the asset class.

The chart below shows a very clear picture of the volatility difference between U.S. Treasury and municipal markets. Obviously, muni yields will move with the prevailing rates market, but standard deviations and day-to-day volatility is much lower, particularly in recent weeks. The chart below is very “busy” because it shows the yields on 2-year, 10-year and 30-year Treasuries along with 2-year, 10-year and 30-year muni average yields. However, it is easy to tell the difference between the muni yields and Treasury yields here because Treasury is much more volatile day to day. The three muni lines are starkly more smooth in contrast to the three Treasury lines and the muni indices we follow exhibit a much lower standard deviation compared to prevailing rates.

Source: LSEG, The Bond Buyer | Past performance is not indicative of future results.

There are a few reasons why we don’t see the same volatility in municipal bonds. First, a lot of credit is due to advancement in technology. Munis were always a fragmented market with smaller deals and unique callable structures whose pricing is unique among other fixed income instruments due to the tax exemption of the coupon and the commonality of callable, “kicker” structures. That hasn’t changed, but specifically in recent years, we have much better tools to price and value bonds throughout the trading day, which has led to more competition in the secondary market and more visibility to the end investor. Nothing groundbreaking compared to other asset classes, but munis were always an area in the markets resistant to change, and in the past five to 10 years, technological advancement has caught up for municipal bonds. Second, municipal default rates are extremely low and that attracts investors in a turbulent market. According to the default study published and updated by Moody’s every few years, general obligation (GO) — or essential service debt rated A or better — has a 10-year default rate of 0.01%. In volatile markets, fixed income investors look to reduce credit risk, and the municipal market is great way to do that. Finally, as always, the biggest draw for munis is tax exemption. The muni market allows investors the potential to build a predictable stream of tax-exempt income. Current political risk is high, and many states are introducing new legislation and taxes. Municipal bonds give investors a potential way to get ahead of their tax concerns.

As I mentioned before, we are seeing a lot of new cash moving into the municipal market because of the reasons previously listed. We use fund flows as a way to gauge new money coming to the market and looking at the Lipper data, we are at 17 consecutive weeks of inflows into funds. In fact, over the past eight months, we have only seen three weeks of net outflows compared to 30 weeks of inflows. More than half of those inflow weeks were over a billion dollars, and these numbers do not include SMA (Separately Managed Account) capital flows and individual investment in bonds.

I think this data presents two natural questions that should be addressed:

1. What should I be concerned about when investing in the municipal market?
2. What part of the curve presents the most value?

To answer the first question, many states are seeing the political landscape shift and introducing new policies that may or may not be implemented over the coming months and years. This introduces some uncertainty into the market and recently, we’ve seen some big names in the news express concern about the fiscal health of states and municipalities. We think it is important to remember a few key facts about municipal debt. General obligation bonds are backed by the full faith, credit and taxing power of the issuing government. Population erosion or a shrinking tax base is a key factor to watch on these credits. Credit issues with general obligation debt are large tectonic shifts in a tax base or population size and can be witnessed over a long period of time. Detroit is an example of the largest general obligation default in history and between 1950 and 2010, the city lost roughly 70% of their population and tax base. However, they didn’t file chapter 9 until 2013. Can a law change or policy impact the creditworthiness of a municipality? Absolutely, but we should view those credit events from the lens of a long-term impact on revenues rather than a short-term reaction. Essential service revenue bonds, including utilities like water, sewage and electricity, can be affected by the same factors. In the municipal space, we are not currently experiencing any material population shifts that would cause that kind of credit concern. However, we would review any tax allocation, annual appropriation or certificate of participation bonds. New tax policy and legislation changes can create short-term stresses on municipal economies and these are bonds that either require annual budget approval, or they are paid for by a lease or a very specific stream of revenue. When political risk is higher, these are the credits to underweight and should be evaluated on a case-by-case basis. In a lower rate environment, these bonds provided a desirable pickup in yield, but as rates have risen, the yield benefit of these credits has not proportionally increased.

Finally, what part of the curve presents the most potential value? The best way to answer this question is by looking at the Treasury yield curve versus the tax equivalent yield curve for municipal bonds so we can directly compare tax adjusted yields. Munis inside of seven years provide very little value over Treasury, so we are underweight this part of the curve outside of cash management purposes. Munis maturing between 15 to 20 years exhibit the steepest yield pickup over Treasuries, flattening out around 25 years. We are looking at bonds in that 15–25-year range with a strong underlying tax base, higher coupons to help increase the benefit of tax exemption and a modest duration to reduce overall portfolio volatility.

Source: MMD | Past performance is not indicative of future results.

CRN: 2026-0305-13289 R