U.S. Municipal Bonds Fall 4.4% in September, Worst Monthly Performance Since Lehman Crisis
nashnova research
US municipal bonds fell roughly 4.4% in September, the steepest monthly loss since the Lehman Brothers collapse in 2008; inflation fears and rate-hike expectations drove the sell-off, though prices have now rebounded for two straight days.
How bad was the drop?
The Bloomberg Municipal Bond Index fell about 4.4% in September — the largest single-month decline since September 2008, when Lehman Brothers collapsed.
Muni yields surged to their highest level since at least 2011. This means → bondholders just suffered the worst paper losses in nearly two decades; bond prices move inversely to yields, so higher yields equal lower prices.
In plain terms = munis are supposed to be the "boring, safe" corner of the market. A hit this big hasn't happened since the global financial crisis.
What triggered the sell-off?
The core driver was the US-Iran conflict stoking inflation fears, compounded by rising expectations that the Fed will keep hiking rates.
This means → two forces squeezed bonds simultaneously — geopolitical risk pushed inflation expectations higher, and higher inflation expectations reinforced rate-hike bets.
In plain terms = investors feared prices would keep climbing and rates would keep rising, so they dumped bonds all at once, driving prices down sharply.
Has the bleeding stopped?
Muni prices rose for a second consecutive day on Thursday, ending a nearly two-week slide.
By noon New York time, the benchmark 10-year muni yield fell 7 basis points to about 4%; the 30-year benchmark dropped nearly 3 basis points to 5.2%.
Ryan Ciavarelli, senior VP of credit research at Belle Haven Investments, said: "There was a rally at the start of the week, with reports of flows into ETFs."
What should investors watch next?
Whether muni yields can stabilize at current elevated levels is the key test of whether this sell-off is truly over.
This means → if yields hold steady and stop climbing, the market has digested the bad news; if they spike again, the sell-off may have further to run.
In plain terms = the current bounce is just a breather — the real signal comes from whether yields can hold firm over the next few weeks.
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