Frank Gargano

"While the shutdown will eventually be resolved, present circumstances may catalyze tactical investment opportunities as a way to capture even more compelling yield and income opportunities," said Jeff Lipton, municipal market intelligence analyst for The Bond Buyer.

October has historically not been "particularly kind to the municipal market, as it tends to be one of the heavier supply months of the year," said Daryl Clements, a portfolio manager at AllianceBernstein.

The muni market may be shaken by a government shutdown, driving short-term volatility and wider spreads, said James Pruskowski, a public finance strategist.

Retail offerings from California and Connecticut led the market Wednesday.

Secondary selling pressure and the larger calendar weighed on the market Tuesday.

"On a month-to-date basis, AAA munis have outperformed Treasuries across the entire curve. … This outperformance can be attributable to an improvement in market technicals," said Daryl Clements, a portfolio manager at AllianceBernstein.

As the "slope of the municipal yield curve remains extremely steep and long bonds are cheap relative to U.S. Treasuries," Daryl Clements, a portfolio manager at AllianceBernstein, predicts "long municipal bonds have a long way to go until they are considered fair value."

Tax-exempt munis, supported by USTs, are having a very good month as MMD yields are down 30 to 35 basis points out long, and both the investment-grade and high-yield indices are seeing gains of more than 2% month-to-date, Barclays strategists led by Mikhail Foux said.

The muni market is in a position to rally in the latter part of this year, said Daryl Clements, a portfolio manager at AllianceBernstein.

Looking solely at internal factors, "the municipal market itself is still doing well, reasonably via the temporary drop in new issue supply amid a more lasting reduction in reinvestment flows," said Matt Fabian, a partner at Municipal Market Analytics.

Issuance for the week of Sept. 2 is at an estimated $7.457 billion, with $6.179 billion of negotiated deals and $1.278 billion of competitive deals on tap, according to LSEG.

"We expect subdued activity again [this] week heading into the Labor Day holiday," Birch Creek strategists said.

Munis underperformed a UST rally, which had everything to do with Powell's speech at the Jackson Hole symposium and future Fed action, said Cooper Howard, a fixed income strategist at Charles Schwab.

"If unfavorable economic numbers ... are released next month, we should expect a hold on any rate cuts and a possible rate hike to follow, putting a damper on any positive returns for the rest of the year," said Jason Wong, vice president of municipals at AmeriVet Securities.

Issuance for the week of Aug. 18 remains elevated at an estimated at $6.166 billion, with $5.065 billion of negotiated deals and $1.101 billion of competitive deals on tap, according to LSEG.

Returns for the month currently stand at 0.64%, which have "pushed muni returns back into the green with year-to-date returns of 0.09%," said Jason Wong, vice president of municipals at AmeriVet Securities.

Over the past three trading sessions, MMD yields have been bumped nine to 12 basis points, while UST yields have fallen over 20 basis points on the front of the curve.