When I started my career in the financial industry in 2007, municipal bonds were a very different investment than they became over the following decade and a half. I remember seeing tax-free municipal yields in the 4% range and thinking that investors were being reasonably compensated for lending their money to state and local governments.
Then, interest rates spent years declining following the financial crisis and later the pandemic. Investors became accustomed to a bond market where earning 4% or 5% on a high-quality municipal bond seemed almost impossible. For a long time, investors were willing to accept much lower yields simply because there weren’t many alternatives.
Today, we’re seeing municipal bond yields move back toward levels that haven’t been common for much of my career. As of early October, high-quality 10-year municipal bonds were yielding around 4.25%, while 30-year AAA munis were around 5.20%. Sounds pretty attractive for an investor that has lived through the muni yields over the past 20 years.
So why did municipal bond funds get hit so hard in September?
The primary reason: interest rates. When interest rates rise, existing bonds become less valuable. If you own a municipal bond paying 4% and newly issued bonds are paying 5%, investors have less incentive to buy your 4% bond. As a result, its market value falls. That is essentially what we’ve been seeing.
September was particularly difficult for the municipal bond market, as rising Treasury yields pushed bond prices lower. The Bloomberg Municipal Bond Index experienced one of its worst monthly declines in years.
But there is an important distinction here: the recent weakness in municipal bonds is not necessarily a sign that municipal credit is deteriorating. Much of the selling has been driven by higher interest rates, an unusually large amount of new muni supply, muni fund outflows that have suddenly appeared, and investors selling bonds to harvest tax losses.
There is another factor that investors need to understand; not all municipal bond funds are created equally. Some funds have longer maturities and greater interest-rate sensitivity. Others take on additional credit risk. And some closed-end municipal funds use leverage, which can magnify both gains and losses.
For example, a leveraged municipal fund can experience a much larger decline than someone might expect simply by looking at the word “municipal” in the fund’s name.
The good news is that there is another side to falling bond prices: higher yields. As municipal bond prices have fallen, yields have risen to levels that are becoming more attractive for investors focusing on tax-efficient income. For someone in a higher tax bracket, a tax-exempt municipal yield can be particularly compelling when compared with the taxable yield available from other fixed-income investments.
So, should investors be concerned? I don’t think the answer is simply yes or no. The recent volatility is a good reminder that bonds are investments, not cash. Even high-quality bonds can decline in value when interest rates move higher. At the same time, today’s higher yields may be creating opportunities that weren’t available a year ago.
I think the bigger lesson here goes beyond municipal bonds. When an investment declines, our first reaction is often to ask, “Should I sell?”. A better question may be, “Why did it decline, and has anything fundamentally changed about why I owned it in the first place?”. Understanding the difference between temporary price volatility and a permanent change in an investment’s value can make a big difference when making long-term financial decisions. That is ultimately what matters.
Have a blessed week!
Joe Shearrer
www.FerventWM.com
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly. Market conditions can change quickly. This article reflects information available on October 6th, 2026.
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Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
Sources: https://www.reuters.com/business/finance/stocks-wobble-no-sign-panic-yields-surge-2026-09-15/