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Longer-dated muni-bonds were particularly vulnerable to the Fed’s announcement as those with maturities greater than 22 years posted a negative 0.78 percent return for the month. Municipal bonds towards the front end of the curve were largely unchanged, with those in the one to five-year maturity range returning negative 0.02 percent. Intermediate municipals with five-to-ten year maturities returned a negative 0.27 percent in August.
While investment-grade muni bonds ended their streak of positive monthly returns, higher-yielding credits continued to march higher. The Bloomberg Barclays Muni High Yield Index returned a positive 0.26 percent. High yield municipal bonds have outperformed their investment-grade counterparts each month since May but remain behind year-to-date. Within investment grade, Baa-rated municipals were the best performing rating category, returning negative 0.04 percent, but have underperformed higher-rated peers year-to-date. AAA-rated municipal bonds returned negative 0.63 percent in August.
Demand continues to remain strong with municipal funds posting their 16 weeks of consecutive inflows. However, investor flows into municipal bond funds slowed towards month-end as Congress broke for recess without agreeing on phase 4 stimulus measures. Negotiations appear likely to continue into the fall as investors search for clarity around the size and scope of any additional packages.