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Uncertainty in the
Municipal Bond Market

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The municipal bond market has rebounded from the historic volatility in March 2020 following the onset of the Global COVID-19 pandemic. However, uncertainty remains high and the outlook unclear. Strong inflows into the asset class juxtaposed with new challenges for state and local municipalities present investors with a unique environment. Looming debt from halted construction, pension plan liabilities, and stalled economic activity may pressure local economies for the next 12-18 months in a way that has never been seen before. While the Fed’s policy actions have helped prevent a credit crisis, the future is unknown for what has traditionally been a safe haven asset class for investors seeking tax free income. Many investors are looking beyond yield to higher quality credit selection. Now may be the time to upgrade the quality of your municipal bond portfolio.

State of the Muni Market


Source: Bloomberg and Lipper U.S. FundFlow

Fund Flows Reverse Course

  • After record redemptions in March 2020, fund flows turned positive in April.
  • The quarter finished strong with seven consecutive weeks of net inflows.
  • 3Q 2020 weekly flows totaled nearly $7bn.

Issuance Strength Continues

  • As of September 30th, 2020 supply was strong, up 22% over last year.
  • The main catalyst was taxable issuance, which comprised nearly 40% of the total supply in Q3 2020 and 30% year to date.
  • Meanwhile tax-exempt supply has been basically flat for the year.


 *Refundings and combined new issue and refunding deals. 2020 data has been annualized.
Source: Bloomberg and Lipper U.S. Fund Flow. GW&K assumes no responsibility for the accuracy of the data provided by outside sources.

What is 2020's Impact on Market Valuation and Credit?

Muni Credit Spreads vs. AAA Rated Muni Bonds

Sources: GW&K and MMD
A basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument

The State of Credit Spreads

  • For 3Q 2020, benchmark AAA-rated bonds were up 0.93% while BBB-rated bonds were up 3.47%.
  • While gaining ground, BBB-rated bonds have still underperformed AAA issuers by over 300bps year to date.
  • During times of market stress, lower quality segments of the market have exhibited significantly more volatility
  • As uncertainty lies ahead, a higher quality positioning may help investors side-step potential risks

A Downward Trend?

  • After sustained periods of rating agency upgrades, 2020 has caught a downward trend
  • While defaults are expected to remain relatively low, there is an elevated risk of further rating agency downgrades in a post-pandemic market
  • As the right axis shows, defaults are generally rare but the impact of an unprecedented year like 2020 is still unknown. 
  • Because of the complexity and slow moving nature of the municipal bond market, impact to state and local issues is often not clear for years after an economic recession.

Municipal Bond Downgrades & Default Trends

Source: GW&K, Moody's, Standard & Poor's 2019 Annual U.S. Public Finance Default Study and Rating Transitions, NBER. GW&K assumes no responsibility for the accuracy of the data provided by outside sources. The upgrade downgrade ratio is the total number of agency rating upgrades minus the total number of rating agency downgrades

GW&K's Active Approach

GW&K Investment Management is a dynamic investment management firm that offers asset allocation, active equity and fixed income investment solutions to help meet the needs of a diverse client base. GW&K’s founding principles of applying rigorous fundamental research, focusing on quality and maintaining a long-term view still guide its investment process today.

learn more about GW&K's approach & philosophy


  • There are 50,000 issuers in the U.S., GW&K's research is focused on fewer, not more. This allows GW&K to trade in any market environment, and have a deep understanding of every credit they own
  • Combination of active Top-Down/Bottom-Up disciplines
  • In a complex and thinly traded market, GW&K delivers thorough and comprehensive credit research
  • High analyst-to-credit ratio
  • Quality-focused, national portfolios


  • Flexible portfolios to react to (not predict) market trends and dislocations 
  • Intense fundamental research to uncover and exploit market inefficiencies all along the yield curve
  • In a retail dominated market, duration and yield curve management has been a staple of GW&K's value add strategy
  • Broadly diversified–by geography, sector, issuer, and structure


GW&K Municipal Bond Market Outlook

There is significant variance across issuers from state to state with many local economies managing substantial budget gaps through the pandemic. Now is an important time to know what you own. GW&K has been managing high quality municipal portfolios since 1974 and has experience in all types of markets.

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Funds to Consider

Advisor Action Plan


Recognize the risk. Current municipal bond market forces are historically unique.


Reevaluate your municipal allocation. Now is the time to look beyond yield, to higher quality.


Reach out for a consultative municipal bond portfolio analysis. Know what you own and how it compares.


Bond refinancings or “refundings” are used by state and local governments most frequently to achieve debt service savings on outstanding bonds. 

This represents the views and opinions of GW&K Investment Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. Past performance is no guarantee of future results.

There are risks associated with investments in debt securities, such as default risk and fluctuations in the perception of the debtor's ability to pay its creditors. Changing interest rates may adversely affect the value of an investment.

An increase in interest rates typically causes the value of bonds and other fixed income securities to fall.

Factors unique to the municipal bond market may negatively affect the value in municipal bonds. Investment income may be subject to certain state and local taxes, and depending on your tax status, the federal alternative minimum tax. Capital gains are not exempt fromfederal income tax.

Market prices of investments may fall rapidly or unpredictably due to a variety of economic or political factors, market conditions, disasters or public health issues, or in response to events that affect particular industries or companies.

GW&K assumes no responsibility for the accuracy of the data provided by outside sources.

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