The great municipal repricing: why now may be the best opportunity in years

Municipal bond yields are now at historically high levels, exceeding 20-year averages and offering compelling tax-equivalent income. This shift follows September's rate selloff, driven by Fed hikes, strong economic data, and elevated issuance. The municipal market saw an amplified move higher due to heavy supply and tax-loss harvesting pressures.

These elevated yields compare favorably to other fixed income options on a risk-adjusted basis for high-tax-bracket clients. The steep yield curve presents opportunities for carry and roll-down returns. Historically, periods with 30-year municipal yields above 4.5% have led to substantially higher forward returns.

While near-term volatility is likely due to continued high issuance and potential tax-loss selling, the income opportunity at current levels is the main draw. Strong credit fundamentals, with state tax receipts up 6.3%, provide a stable backdrop. We recommend focusing on locking in these yields rather than timing the market's peak, considering an up-in-quality approach to credit selection.