Muni Market Update: Elevated Yields and Ratios

A buyer’s market has emerged as tax-exempt yields hit an air pocket over the past couple of weeks, experiencing weak market conditions and, therefore, higher yields. The reason for the sell-off is due to a combination of fund outflows[1] – possibly related to tax season liquidity needs and portfolio rebalancing – and a backdrop of rising treasury rates. The average 10-year AA rated municipal[2] now yields 3.21%, up from below 3.00% at the beginning of March. Prices have moved down as they are inversely related to yields. This sell-off has occurred alongside treasuries, but to a greater extent. The 10-year treasury has moved to 4.23% from 4.10% in early March.[3] This sets munis up for their most attractive relative valuation since 2023 and we believe a great entry point for investors.

Yields are nominally attractive with 5% taxable equivalent yields[4] readily available for maturities under 10-years. Further out on the yield curve, tax-exempt yields of 3.80-4.25% are being priced in 11-17 year bonds. At the top bracket, this is equivalent to a range of 6.03%-6.74%. Furthermore, valuations compared to treasuries are compelling. This is demonstrated by the muni/treasury ratio. The higher the ratio, the higher the yield munis are relative to treasuries. This ratio now stands at 75%, nearing a 2-year high.[5]With elevated yields and ratios, we believe now is an excellent time to rebalance into munis. 5.00-7.00% taxable equivalent yields at the top bracket are readily available.

 

 

 

Chart Source: Bloomberg, March 31st, 2025

[1] According to LSEG Lipper Global Fund Flows, investors pulled $573mm from municipal-bond funds in the week ending Wednesday March 26th.
[2] Source: MMD
[3] Source: Bloomberg
[4] When calculated at the 37% federal tax bracket
[5] Source: Bloomberg BVAL AAA 10-year Municipal Yield