The dynamic municipal bond market 

The tax-exempt municipal bond market has always been home to rapid changes. From adjusting coupons for interest payments to municipalities changing their issuance levels because of population changes, municipal bonds react to influences that often impact few other markets. Some of the more common influences are coupon changes, sector liquidity, call structures, issuance fluctuations, and credit profile changes. 

These collective shifts sometimes affect only a single issuer and at other times may result in structural changes felt throughout the entire municipal market. Moreover, as the markets evolve, the collective shifts affect not only municipal bond yields but also the time remaining to principal repayment. In certain scenarios, even the taxability of newly purchased bonds may be affected.

Active vs. passive municipal bond strategies 

Portfolio management approaches are often broken down into two categories: active or passive strategies. Recent-year totals for collective assets under management for municipal bond funds falling within both of these approaches are illustrated in Exhibit 1. 

Exhibit 1: Municipal bond funds, assets under management

Sources: London Stock Exchange Group; Bloomberg; J.P. Morgan. Data as of 3/15/24. 

Passive strategies typically provide exposure to all areas of the market that are covered by an index against which a fund is benchmarked. These strategies tend to be rules-based, with the goal of minimizing the differences between the benchmark and the fund. The rules guiding these strategies are stable and managers do not generally react to shifting market conditions or relative value opportunities. 

Active management strategies typically maintain a broad exposure to most of the market, similar to passive investments. A core difference from passive investing is that active strategies usually assess and attempt to capitalize on perceived relative value opportunities. Active portfolio management teams, often in coordination with risk management and credit analysis colleagues, then attempt to exploit market inefficiencies, endeavoring to potentially reduce client risk or increase total returns. 

Our viewpoint on the current market environment 

Tax-exempt yields are still high right now compared with recent historical levels. In addition, the yield curve remains inverted, meaning that select shorter-term municipal bonds are yielding more than some longer-term municipal bonds. For investors looking for broad muni exposure at a minimal fee, an indexed-based approach may be appropriate, even in the current environment. However, with the shifting dynamics of the municipal bond market in mind, a more flexible and dynamic approach that seeks better relative value opportunities through an actively managed approach might also make sense.