Clients have been reaching out to us for our view on the incredible market volatility the municipal bond market has experienced since the “Liberation Day” tariff announcement on Wednesday, April 2nd. To say volatility has been extreme would be an understatement. Immediately following the tariff announcement, 30-year AAA municipal rates rallied 20bps to 3.96%. The following three trading days brought an 85 bps sell-off, with yields reaching a high of 4.80%. Yesterday, the AAA market recaptured much of what had been lost over the prior week, 45 bps, closing at 4.36%. The high-yield market has experienced similar volatility. A benchmark high-yield issue, Buckeye Ohio Tobacco Settlement 5.00% due 2055 traded at $90.631 on April 3rd and $80.027 on April 9th, a nearly 12% price decline. The natural question arises whether the price volatility represents fundamental credit concerns, sympathy with other market volatility or market anticipation of changes to federal tax-exemption?

We view the volatility as the natural result of technical factors affecting the municipal bond market rather than a fundamental shift in credit or tax status uncertainty. In our April Note, we recognized April was likely to bea challenging month for municipal market performance. We highlighted the following seasonal factors:

• Traditional April retail selling to make federal and state tax payments
• Continued heightened new issue supply
• Low re-Investment demand from April maturities and coupons

When combined with equity and US Treasury market volatility, the municipal market was a tinderbox looking for a spark, and it found it. We have long highlighted the fundamental mismatch between liquidity provided investors in open-end mutual funds and ETFs and the liquidity of portfolio assets. The analogy we use is: Home or condo owners have a sense what their property is worth. When asked what it is worth to close in 2 days with cash, that value drops precipitously. Municipal portfolio managers forced to raise capital to meet investor redemptions are faced with a similar dilemma. Portfolio managers look for liquidity in bonds they know they can trade, irrespective of the price. As a result, the “most liquid” bonds trade at discounts to prior trading levels with discounts accelerating over time.

We usually view periods of severe dislocation as tremendous investing opportunities. Investors providing liquidity in these periods of illiquidity are usually rewarded with significant returns, high levels of tax-exempt income and total return performance as the market normalizes. They only caveat in the current market environment remains uncertainty regarding future tax treatment of municipal bonds. We believe it is highly unlikely to eliminate tax-exemption on a retroactive basis. In the event taxexemption is eliminated going forward, existing bonds should benefit from scarcity impact. A narrow majority in the House and Senate leadsus to believe major changes to the municipal market are unlikely.

Finally, from a credit perspective we remain highly constructive on our chosen revenue bond sectors. While inflation impacts everyone and thevalue of fixed income instruments, proposed tariff policies are not likely to greatly impact our borrowers. We look for borrowers with stable business models and a level of essentiality in their services.

We are happy to provide additional detail or answer any further questions, if you are interested.