What happened in the muni market
Municipal debt snapped back in October after a bruising September. Through Thursday, the Bloomberg Municipal Bond Index has risen roughly 3.6% this month, setting munis up for the strongest October back to at least 1980 and for their best month since November 2023.
If the month holds, it would also be the first positive return since June, after a run of declines tied to worries about inflation and rate hikes. September's selloff drove muni yields to territory investors had not seen since at least 2011 and produced the weakest monthly performance since 2008.
Why investors returned
Cheaper prices and higher yields pulled buyers back in, and investors who sold in September to realize losses for taxes started putting money back to work. That tax loss approach - selling at a loss to offset taxable income or gains, then reinvesting, often via muni ETFs - helped reset positioning without abandoning the market.
"A lot of people all at once are interested in the asset class for different reasons, but I think it is a value play right now," said Eric Kazatsky, who is client portfolio manager with MacKay Municipal Managers. Higher yields are inviting a broader set of buyers, he added. Mark Marinella of Capital Group, who serves as a portfolio manager, said, "Investors learned and thought this may be an opportunity to gather some losses in portfolios," emphasizing, "What's important about that is that it's not investors running away from the muni bond market, that's investors harvesting losses, but staying in the muni bond market."
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Supply, pricing, and the setup from here
September's volatility even caused some borrowers to postpone deals as they waited for better conditions, and others delayed refinancing after yields jumped. BlackRock Inc.'s municipal bond group is led by Pat Haskell, who said the shakeout left the market in a stronger position. In BlackRock's global fixed income outlook for the fourth quarter, he wrote, "Investors do not need to correctly predict the next move in rates to find value in municipals today," adding, "Instead, the recent repricing offers an opportunity to lock in historically attractive income and let yield do more of the work."
Debt issuance by US states and local governments is running at a record pace as infrastructure needs grow. Borrowing has already exceeded $500 billion so far this year; compared with the same period a year ago, issuance is up about 6%, and Bloomberg data indicate the market is likely to exceed $600 billion by year end.
What this means for your portfolio
For muni holders, October's rally alongside higher starting yields means more income today and a thicker cushion against future rate swings. The selloff also let investors harvest tax losses while staying in the asset class, with many rotating into muni ETFs to keep exposure.
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