A sweeping selloff in the U.S. municipal bond market drove state and local government debt to its busiest single-day trading session in more than three decades.
According to reports filed with the Municipal Securities Rulemaking Board (MSRB), approximately 117,419 municipal bond trades were recorded on Monday, the highest number of transactions since at least 1995. Trading volume measured by par value also rose, though it has not yet reached a historical record.
MSRB data shows that $21.8 billion in municipal bonds changed hands on Monday, lower than several trading days earlier in the month but above the one-year average of roughly $14.6 billion.
The surge in trading comes as investors grapple with inflation concerns intensified by the ongoing U.S.-Iran conflict and fears of a hawkish pivot by the Federal Reserve, triggering a broad selloff across the bond market.
Benchmark municipal bond yields climbed again on Tuesday, rising by as much as 3 basis points at one point. Andrew Clinton, CEO of Clinton Investment Management, said elevated absolute yields have attracted new buyers, sharp interest rate swings have created tax-loss harvesting opportunities, and some investors have been unsettled by the selloff — all factors that together fueled the surge in municipal bond trading.
"All of these things came together to bring about greater volume. And until yesterday, the new issue calendar had been fairly heavy and strong, so there was a lot of trading going on, with people selling other bonds in their portfolios to make room for the new ones they were buying," he said.
Municipal bond prices have continued to fall, pushing benchmark yields to their highest level since at least 2011. The market is on track for its worst monthly performance since 1987, having posted a decline of 4.7% so far this month.
Ben Barber, head of municipal bonds at Franklin Templeton, said that given all the factors working against the asset class, municipal bonds have held up reasonably well. Supply this month has exceeded $51 billion, the highest level for a September since 2020, according to compiled data.
"Municipals have clearly underperformed Treasuries, there is no question about that, but given the very strong primary market flows and historically high bid-to-cover activity, the performance hasn't been as bad as one might imagine. So we would characterize the overall trading environment as relatively orderly," he said.
Comments