Demand is down for municipal bonds, which just erased nearly all of their January gains amid fears of rate increases. The markets’ bumpy start to 2023 is causing whiplash even in the historically placid realm of state and local government debt. Municipal bonds this month have erased nearly all of their January gains after fears of rate increases cooled investor appetites. … Most bonds in the $4 trillion muni market are backed by state and local taxes, and prices for the ultrasafe securities tend to move in line with Treasurys. Demand rarely flags because the bonds have a perk coveted by high-income investors: Interest is generally exempt from federal and state taxes. A tax-free yield of 5% equates to a taxable yield of around 8% for investors in the top tax bracket, according to data from Nuveen Asset Management. … But after more than a year of investors and traders trying to predict what the Fed will do, heads are spinning even in the muni market. Over the past two months, debt maturing in one year has been trading at higher interest rates than debt maturing in three years, according to ICE Data Services. Market professionals say they can’t remember that happening for such a prolonged period in more than a decade.
Source: WSJ.com: Markets