Munis after a terrible Q1 and 8 factors that have us constructive

Paul M. Drury, CFA, Portfolio Manager, and Garrett L. Hamilton, CFA, Portfolio Manager, 04/22/22

Municipal bond yields have moved considerably higher this year in response to increasing U.S. Treasury yields and muni mutual fund outflows. Markets are repricing a more aggressive tightening cycle for 2022 as the Federal Reserve tries to bring down stubbornly high inflation.

Muni bond funds, after record inflows of $101 billion in 2021, experienced outflows for 15 consecutive weeks in 2022.* The result? The first quarter total return of the Bloomberg Municipal Bond Index (-6.23%) marked the worst quarter since Q3 1981 (-9.69%). It was also the worst return for a first quarter since 1980.

Bloomberg Muni Index quarterly return analysis (1990–2022)

municipal bond performance during certain macro events

Source: Bloomberg Municipal Bond Index.

Typically, such a market return could be a negative omen for future muni fund flows. And maybe it will be. Muni fund outflows pressure returns as managers sell bonds to raise cash for redemptions. Muni bond funds have been in outflows in early 2022 as $38 billion has been redeemed as of April 21, 2022 (JPMorgan).

However, we may see brighter days ahead

1. Our analysis (above) shows that historically, muni index returns are positive in the 3 quarters after a difficult return quarter.

2. Muni index returns usually turn positive 2-3 months before muni fund outflows end (see table below)

muni performance when outflows end

Source: Lipper U.S. Fund Flows 2021, JPMorgan.

3. Overall, muni sector credit fundamentals remain strong, we believe

4. Muni taxable equivalent yields are attractive at 5%+ (see below)

5. State and local pension funding is at its highest level since 2008

6. Muni defaults remain within long-term ranges and are isolated in the lowest rated/nonrated cohorts

7. Higher interest rates could dampen refunding/refinancing activity, reducing new issue supply estimates

8. U.S. equity markets remain near all-time highs as of this writing

Muni taxable equivalent yields (TEY) are attractive at nearly 5%

municipal bond taxable equivalent yield

Sources: Bloomberg Municipal Bond yield data, with Putnam analysis of impact of 40.8% tax rate. The 40.8% tax rate comprises 37% (highest marginal U.S. income tax rate) + 3.8% NIIT rate.

We believe investors may want to consider an allocation to the municipal bond asset class.

Learn more about our active, research-driven approach to tax-exempt investing.

Evaluate yields on a tax-equivalent basis

Compare municipal funds on equal footing with taxable bond funds.

Try our tax-equivalent yield calculator

yield vs. taxes chart


The Bloomberg Municipal Bond Index is an unmanaged index of long-term fixed-rate investment-grade tax-exempt bonds. You cannot invest directly in an index.

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approve or endorse this material, or guarantee the accuracy or completeness of any information herein, or make any warranty, express or implied, as to the results to be obtained therefrom, and to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.