After U.S. Treasuries were sold off, funds are "buying the dip" in municipal bonds! Two major ETFs attract record inflows, with nearly $3 billion flowing in during a single week.

After recent sharp volatility in the bond market led to capital outflows from some U.S. municipal bond ETFs, money is now rapidly flowing into the largest municipal bond funds. Last week, the two largest U.S. municipal bond ETFs, managed by BlackRock, Inc. and Vanguard Group, both recorded their largest single-week inflows on record, indicating that as yields rise to multi-year highs, municipal bonds have become significantly more attractive to investors. Data compiled by Bloomberg show that last week, BlackRock, Inc.'s iShares National Muni Bond ETF (MUB.US), with about $46 billion in assets, attracted roughly $1.2 billion in inflows; Vanguard Tax-Exempt Bond Index ETF (VTEB.US), with about $47 billion in assets, recorded about $1.7 billion in inflows. The two ETFs together took in about $2.9 billion, and both set their own record highs for single-week inflows. It is worth noting that not long ago, rising U.S. Treasury yields triggered a bond market selloff and led to large-scale outflows from some other municipal bond funds. Now, money is flowing back into large municipal bond ETFs, suggesting that some investors are beginning to view the recent price declines as an opportunity to position. Nathan Will, head of municipal credit research at Vanguard Group, said the currently attractive yield environment may be an important reason driving inflows into municipal bond funds. As municipal bond yields have risen sharply, it has become difficult for many investors to find comparably attractive "tax-equivalent yields" in other fixed-income markets. At the same time, municipal bonds are now also more attractively valued relative to taxable bonds. Will said that against this backdrop, investors may be viewing market volatility as an opportunity to increase exposure to high-quality, tax-advantaged assets. On Monday, the yield on the U.S. 10-year benchmark municipal bond rose to its highest level since April 2025. Earlier this month, the yield on the 30-year benchmark municipal bond even rose to its highest level since 2011. Recently, higher U.S. Treasury yields, combined with a large volume of new municipal bond issuance, have jointly pressured the municipal bond market, pushing bond prices down and yields up. But for investors seeking tax-exempt income, higher yields have instead increased the current appeal of allocating to municipal bonds. In addition to higher yields, "tax-loss harvesting" may also be another important reason for the recent large inflows into municipal bond ETFs. Chris Brigati, chief investment officer at SWBC Investment Services, said investors may be selling municipal bond holdings that have incurred losses to realize capital losses, while temporarily maintaining exposure to the asset class by buying municipal bond ETFs, without having to immediately find the most ideal replacement bonds. So far this year, the U.S. municipal bond market has remained weak, with cumulative returns down about 1.9%. However, Brigati believes this weakness has instead created opportunities for investors to engage in tax-loss harvesting. Investors can realize losses by selling losing assets and use those losses to offset capital gains generated by other asset classes such as stocks. Therefore, the recent record inflows into municipal bond ETFs do not entirely mean that investors have suddenly turned optimistic about the bond market outlook, but may also reflect both the allocation appeal brought by high yields and year-end tax-related operational needs. As higher U.S. Treasury yields and heavy new bond issuance continue to affect the fixed-income market, municipal bond prices are under pressure, but yields rising to multi-year highs are also beginning to attract money seeking high-quality, tax-advantaged fixed-income assets back into the market.