The muni market often struggles in the weeks leading up to the April 15 tax deadline because of tax-related selling pressure. And while the market has faced weakness this year, tax selling has been limited.
Spring is typically a "difficult time of year, from a performance perspective, as the muni market always contends with elevated supply, tax-related selling pressure and low reinvestment demand from coupon and maturities," said Bob Lind, co-founder of Lind Capital Partners.
These seasonal technical factors, along with significant U.S. Treasury volatility, led to underperformance in March, he said.
Investment-grade munis saw losses of 2.32% in March, dragging year-to-date performance to negative 0.18%.
USTs saw losses of 1.74% in March and were essentially flat in Q1 at negative 0.04%, and corporates saw negative returns of 1.98% in March and 0.54% in Q1.
Overall, tax season always makes the muni market a bit "nervous," said Shannon Rinehart, senior portfolio manager of municipal debt at Columbia Threadneedle Investments.
"We never know how much folks will tap their muni portfolios to help pay that tax bill," she said.
However, this year, tax selling has been minimal, market participants said.
Over the last week or two, bid wanteds have not been as large as one might expect, said Kim Olsan, senior fixed-income portfolio manager at NewSquare Capital.
Even with volatility seen throughout March, the bid wanteds were on the "quieter side," she said, noting while bid wanteds were elevated toward the end of the month, that may have had more to do with the end of the quarter.
Money market balances "popped up" a bit in the last several weeks, so investors could use these funds for tax payments, Olsan said.
Tax-exempt money market funds rose to $146.1 billion for the week ending Wednesday, according to the Investment Company Institute.
Additionally, daily floaters reset at 2.14% last Thursday from 1.74%, which could mean some money markets are getting liquidated, Olsan added.
There have been some heavier bid lists with blocks on the short end, so that could be people coming out of funds or exchange-traded funds, she said.
There are a few reasons for the limited tax selling this year: "Everybody talks about the fact that cash and money market funds pay such a nice return now. Most high-net-worth individuals are sitting on plenty of cash. So maybe that's just a continued function of that," Rinehart said.
Last year, it was hard to read about the tax implications the market faced because of Liberation Day, she noted.
"This [may be] a new normal, as long as cash is offering what it's offering. People might not need to tap the muni market as much to fund that tax bill," Rinehart said.
"Historically, the weeks leading up to the April 15 tax day have been challenging for the municipal market, often due to weaker supply and demand dynamics," said Sam Weitzman, a product manager at Western Asset.
The weakened demand during March and April, in part, comes from increased selling activity by taxpayers that liquidate their muni holdings to cover tax liabilities, he said.
This year, the demand for munis "diminished" after a period of consistent fund inflows since the start of 2024, according to Weitzman.
Investors pulled $544.4 million from muni mutual funds in the week ending March 25, breaking a 17-week inflow streak, according to LSEG Lipper. Over the same time period, ICI reported outflows of $218 million.
While it was hard to "pinpoint" the cause of the outflows, it is not unsurprising given March's volatility and the approaching tax deadline, said Daryl Clements, a portfolio manager at AllianceBernstein.
Additionally, tax season "muffled" demand for munis and it slowed the investor response to the 50 basis points to 60 basis points of extra yield that were added in March, said Matt Fabian, president of Municipal Market Analytics.
"It may still restrain [buying] because it's not over yet, even though, from a timing perspective, it's almost over," he said.
There could still be some temporary disruption to the market even with the April 15 tax deadline almost here, said Jeff Timlin, managing partner and head of municipal bond investing at Sage Advisory.
However, it should be less disruptive to the market in terms of yields compared to past years, as there's so much money sitting in muni money market funds, he said.
