Investors are buying munis into the spike. Here’s what’s driving it.
The Signal
Something unusual is happening in the municipal bond market.
Yields have climbed sharply since the Iran conflict began — and yet investors keep buying. Muni funds have attracted more than $38 billion so far this year, ranking as the second-strongest year-to-date inflow on record. Typically, a rate spike of this magnitude prompts panic-selling as prices fall. That hasn’t happened.
We continue to be buyers at these levels. On the longer end of the curve, yields have moved up roughly 40 basis points; in the belly and shorter end, 20–25 basis points. The market is trading on a combination of White House news flow and inflation data — and will continue to do so until the geopolitical picture clears.
What’s Driving It
The Iran conflict and inflation are moving in tandem.
Federal Reserve Governor Christopher Waller has stated that the central bank’s next rate move could just as easily be an increase as a cut, as energy prices tied to the conflict push inflation higher. Waller’s current posture is to hold rates and wait for clarity — but he has signaled that a hike remains on the table if inflation does not slow. Citadel Securities has gone further, arguing that inflation, not the labor market, is now the dominant risk and that the Fed should adjust its stance accordingly. We view this as an aggressive read. Inflation numbers are running higher, but a pivot to active hiking may be premature. We expect yields to remain elevated for the next several weeks, with limited calm until the conflict winds down and crude prices retreat — likely not before mid-summer.
How muni credit risk is being evaluated is shifting.
Municipal investing is increasingly less about legal repayment structures and more about identifying assets that society will not allow to fail. Water systems, public power, and critical transportation networks are trading like strategic infrastructure — supported not only by operating revenue but by the political reality that governments rarely let them collapse. That dynamic may create real alpha for investors focused on revenue durability, essentiality, and implicit sovereign backing rather than credit labels alone. We continue to emphasize higher-grade paper with strong insurance or essential-service characteristics. Historically, this paper has delivered both performance and the stability our clients are seeking.
Deal sizes are growing.
We have been discussing with clients how muni deal sizes are increasing, driven by expensive infrastructure projects across the state and local debt market. Billion-dollar deals are becoming the norm, and we expect that trend to continue into 2027 as the underlying cost of products and services rises.
Our Take
The Iran accord story has become predictably unpredictable. When signals of a potential agreement surface — as they did this week, briefly sending 10-year Treasury yields to their lowest levels in over a month — prices move. When the news reverses, so do yields. We have been walking clients through exactly this dynamic for several weeks. It is not noise. It is a pattern that may create favorable entry points for disciplined buyers.
Treasuries also caught a brief bid this week when benchmark oil prices dipped on accord speculation, before reversing to near-unchanged levels after Iranian state television reported an unofficial draft memorandum of understanding. We view both the dip and the reversal as consistent with the on-again, off-again nature of these negotiations.
Our positioning remains unchanged: we are buyers at current levels, focused on essential-service and insured paper, and prepared to act when volatility presents an opening.
Recommendations
Use yield volatility in both directions. Moves tied to Iran accord headlines — up or down — may create favorable entry points. We are watching and prepared to act.
Favor essential-service and insured paper. Water systems, public power, and critical transportation infrastructure continue to carry implicit backing that goes beyond their credit ratings.
Expect elevated yields through mid-summer. We do not anticipate a meaningful normalization in rates until the Iran conflict concludes and crude prices decline. Plan accordingly.
Larger deals are worth attention. Billion-dollar issuances are increasingly common and may offer liquidity and pricing advantages compared with smaller offerings.
Let’s Talk
If you would like to discuss any of the above in the context of your portfolio, reach out. This market environment rewards preparation — and that is exactly what we are here to help with.
