Investors are snapping up muni funds at fastest pace in 5 years. Why the good times may last

Volatility hasn't dampened demand for municipal bonds. The assets performed dismally in March but rebounded in April. In fact, the ICE BofA US Municipals Securities Index posted its first positive April since 2021 and the strongest one since 2014. Munis are free of federal tax and, if the holder lives in the state in which the bond is issued, also exempt from state tax. Maybe as a result, investors have piled into muni bond funds at the fastest rate since 2021. Municipal mutual and exchange-traded funds saw net inflows of about $22.3 billion in the first four months of the year, according to LSEG Lipper Global Fund Flows. Investors were able to snap up some deals in April after March's repricing, but AllianceBernstein's Matt Norton still sees a compelling entry point right now. "The all-in yields are still over attractive from an income generation perspective," said Norton, the firm's chief investment officer for municipal bonds. A muni portfolio that has a 4% tax-free yield means investors in the higher tax brackets could approach a 7% tax-equivalent yield, he noted. Bond yields move inversely to prices. "Given the relative safety of the municipal bond market, and what we think are attractive valuations, that could lead to pretty strong performance over the next 12 to 18 months," he added. …