A global bond swoon has caught up with state and local debt. Investors are bracing for stickier inflation as tensions linked to the ongoing US-Iran conflict persist and as markets worry the Federal Reserve may take a tougher stance. That combination has driven a widespread selloff, leaving US municipal debt on pace for a 4.7% monthly loss, per Bloomberg indexes. If that holds, it would be the weakest monthly result since 1987.
The shakeout has yanked borrowing costs sharply higher. Borrowing costs have jumped: the one-year benchmark is up by more than 1 percentage point from the beginning of the month, and the 30-year benchmark is higher by over 60 basis points in that period. On the value side, 10 year munis are delivering about 80% of the yield on comparable Treasuries, and the 30 year muni to Treasury ratio has climbed to roughly 95%. The higher that ratio runs, the cheaper muni bonds appear relative to Treasuries.
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With conditions choppy, many borrowers are pushing back planned deals. At the same time, some managers see opportunity in the softer prices. Investors should consider taking advantage of the selloff given richer yields and better valuations, said Daryl Clements and Daniel Carpenter, portfolio managers at AllianceBernstein. "If you liked munis yesterday, you have to love them today," they wrote in a note.
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