Lind Capital Partners Municipal Market Commentary

Municipal Market Performance and Benchmark Rates: May felt reassuringly pedestrian compared to the near-historic volatility that occurred in April as a result of President Trump’s “Liberation Day” tariff announcement, which now feels like a lifetime ago. After two consecutive months of negative performance, both municipal indices, LMBITR (IG) and LMHYTR (HY), eked out postive returns at 0.06% and 0.07%, respectively, last month. Year-to-date, investment grade municipals are down (0.96%) while high-yield has marginally outperformed, losing just (0.91%). The AAA municipal curve steepened in May as 5-year and 10year benchmark rates ended the month lower by 18 and 5 bps, respectively, while the 30-year was 10 bps higher. While the noise surrounding the threat to the tax-exemption of muncipal bonds abated, for now, headwinds such as elevated supply, interest rate volatility, and reduced reinvestment flows still presented challenges for the market at large in May.

US Treasury market yields experienced siginifcant upward pressure in May propelled by policy uncertainty and fiscal concerns, specifically rising national debt and budget deficits. The 30-year treasury bond bursted through the key 5.00% threshold, touching 5.09% (a level not seen since 2023), before retreating and closing the month at 4.92%.

Mutual Fund Flows: After experiencing seven consecutive weeks of outflows through the end of April, investment grade mutual fund flows bounced back in May and have now seen five straight weeks of inflows, totaling $5.4B, including the last week of April. High-yield fund flows experienced a similar trajectory in May, seeing weekly inflows the entire month, ultimately totaling over $1B. Year-to-date fund flows remain firmly biased towards high-yield, which have seen inflows totaling $3.8B. By comparison, investment grade inflows year-to-date total just over $1B.

Primary Market Supply: Elevated new issue supply has been a major municipal market theme this year and May was no different. Total primary supply this past month exceeded $50B, the highest May volume in over a decade. While only 6% larger than last May’s supply, it is 40% higher than the trailing 5-year average. The high-yield new issue pipeline remains healthy, as LCP evaluates several compelling non-rated and lowerinvestment grade primary deals on a weekly basis. An interesting dynamic in the high-yield segment of the municipal new issue market has been the implications of failing to initially place issues. In the current market, it is not uncommon for a number of primary deals to be placed on “day-to-day” status after lacking initial success placing their deals with sufficient investor interest. Ultimately, these borrowers come back to the market with enhanced credit provisions, a different capital structure, and/or higher yields (LCP purchased a deal last week that was finally priced 62.5 bps cheaper than it was initially marketed). Looking ahead, primary market supply should continue to pressure the market in June, as next week’s calendar is the largest weekly total thus far in 2025.

We opened our doors at Lind Capital Partners in May 2010. This past month marked the 15-year anniversary of our Non-Rated Municipal Bond Strategy providing investors access to this inefficient and fragmented market. Significant milestones such as this often warrant time to pause and reflect on the journey (understandably, we had very little time to reflect during our 10-year anniversary in the spring of 2020…). We are honored to have served our clients through many ups, downs, and changes in the market over the last 15 years and thankful for their trust.

Our business was born in the wake of the Great Financial Crisis, as the U.S. economy was still recovering from its historic collapse. It was also the early stages of what would be a very prolonged period of Zero Interest Rate Policy (“ZIRP”). From 2010 to 2020, the average Fed Funds rate was 0.55%… a tricky time to be a fixed income investor. In addition to the challenging yield environment, like investors across all asset classes we witnessed many additional economic and market changes, including but certainly not limited to: Taper Tantrum (2013), Trump Administration v1 (2016), the COVID-19 pandemic (2020), the end of ZIRP and subsequent Fed Funds rate increases (2022), the collapse of Silicon Valley Bank (2023), Trump Administration v2 (2024), and many, many geopolitical events. Over that time, we’ve also seen the U.S. Federal debt nearly triple, to over $36 trillion and witnessed countless budget & policy disputes. Each of these has contributed to significantly increasing market volatility.

The Non-Rated Municipal Market has also changed significantly over this period. In 2010, analyst Meredith Whitney predicted widespread municipal defaults on 60 Minutes, which drove mass outflows from municipal funds and proved to be historic buying opportunity as her prediction never panned out. Puerto Rico declared its debt unpayable in 2016, and remnants of the restructuring continue even today. We survived legislative threats of the elimination of tax-exemption for municipal bonds in 2016 (and again in 2025). We’ve seen several “mega” economic development deals utilize the high yield municipal market, such as the American Dream Mall and the Brightline Train projects. There have also been notable shifts in our target credit sectors. For example, the passing and implementation of the Affordable Care Act created significant challenges to nonprofit hospitals, and we shifted our investment approach in the healthcare sector. The bond market for charter schools was in its infancy when we began. However, favorable state and federal legislation, as well as the maturation of the underwriting quality, gave way to the charter school sector being a staple in our portfolios.

Also notably, natural disaster risk has become a deeper credit consideration with hurricanes: Irene, Sandy, Isaac, Mattthew, Maria, Irma, Harvey, Florence, Michael, Barry, Zeta, Delta, Laura, Ida, Ian, Idalia. Francine, Beryl, Helene and Milton. Additionally, wildfires that destroyed parts of southern California. The composition of our market has also significantly shifted give the significant growth of high yield ETFs, which we estimate were ~2% of the market in 2010 and now comprise ~16%. The presence of ETFs and more “tactical money” in our market has increased market volatility and, in our opinion, created more opportunity for long-term investors.

While many events have transpired and much has changed over the last 15 years, our fundamental investment philosophy has not. We still firmly believe that fundamental credit analysis is the foundation of every investment decision. As long-term, fundamental credit investors, if we are right on credit, you get your money back and collect your tax-exempt income all along the way. We believe that investors who can withstand short-term market fluctuations and “tune out the noise” can ultimately capitalize on the inefficiencies of the non-rated municipal market. Our strategy has weathered the ups and downs of the market with a 6.18% annualized return since inception (see chart below) which we estimate to be a 10.79% taxable equivalent*. We are encouraged by the current environment and the opportunity at hand for long-term investors in the non-rated municipal market. We look forward to working with our clients and partners for the next 15 years, and beyond.

Lind Capital Partners Non-Rated Municipal Strategy (through March 31, 2025)

The chart above shows the increase in value of $1,000,000 invested in the LCP composite at inception (net of management fees and expenses) vs. the benchmark, the Bloomberg High Yield Muni (LMHYTR) as well as the Bloomberg Muni (LMBITR) indices (it is not possible to invest in either Bloomberg Index). Please contact us with questions regarding credit profile, returns, taxable equivalent yields or further portfolio information. Past performance is not indicative of future results.

Sources: Refinitiv and Bloomberg LP

*Taxable Equivalent estimates the return needed on a taxable investment to equate to the return on a tax-free investment, grossing up the interest component with the formula: Tax-Exempt Interest/(1 – Tax Rate)