During the weeks of the worsening of the pandemic, the municipal bond markets saw less investments in municipal bonds and increased sales by holders of existing municipal bonds. With investors in mutual funds holding municipal bonds withdrawing their investments in those funds, those mutual funds in turn were selling the municipal bonds in which they were invested. Compounding this sell-off, mutual funds were not purchasing, at their historical pace, other municipal bonds. This outflow of cash from the municipal bond market, together with a reduced inflow of cash, resulted in lower prices being paid for municipal bonds, leading to increased interest rates being paid by issuers and increased yields to investors.
Various reasons have been suggested for this change: for example, investor risk assessments associated with municipal bonds may have changed; potential increase in the cost to municipal bond issuers for public support systems; holders seeking to move into cash positions; and general uncertainty.
Not all issuers and municipal bonds are of equal risk in the current economic environment. Consider, by way of example, that some issuers have sufficient rainy day funds to see them through the crisis; some municipal bonds are supported by a revenue stream that may be less impacted by the pandemic.
This is all part of the new economic world we are living in and what is written here at this point in time could change by the time you read it.
