Unprecedented plunge since the Lehman Brothers crisis! US municipal bonds hit hard in September.

The U.S. municipal bond market suffered its worst monthly decline in nearly two decades in September. Persistent inflation concerns and lingering risks of interest rate hikes put pressure on the fixed-income market, causing municipal bond yields to climb rapidly and resulting in significant losses for investors.

The Bloomberg Municipal Bond Index fell about 4.4% in September, its worst monthly performance since the Lehman Brothers collapse in September 2008. Meanwhile, municipal bond yields rose to their highest level since at least 2011, significantly impacting the prices of long-duration bonds.

The ongoing conflict between the US and Iran has exacerbated market concerns about inflation, while the risk of further interest rate hikes by the Federal Reserve remains a significant factor suppressing the bond market. In an environment of generally rising yields, longer-duration municipal bonds are more sensitive to interest rate changes, and therefore experienced particularly sharp declines.

However, the market began to show signs of stabilizing this week. Municipal bond prices rebounded for the second consecutive day on Thursday, ending a nearly two-week losing streak, and funds began to flow back into related ETFs.

Yields rose to multi-year highs, and municipal bonds faced a concentrated sell-off.

According to data compiled by Bloomberg, the benchmark yield on 10-year municipal bonds fell 9 basis points to around 4.02% on Thursday, while the 30-year yield fell nearly 4 basis points to 5.15%. Although they have retreated from recent highs, both yields are still at their highest levels since at least 2011, and the interest rate environment remains tight.

Over the past few weeks, municipal bond yields have climbed rapidly, largely in tandem with the sharp fluctuations in the U.S. Treasury market. Higher U.S. Treasury yields have raised the pricing benchmark for municipal bonds and further depressed the prices of existing bonds.

Ryan Ciavarelli, senior vice president of credit research at Belle Haven Investments, said that after a rapid rise in yields in September, the municipal bond market rebounded this week, with funds flowing into ETFs, driving bond prices back up and providing issuers with opportunities to complete financing once market conditions improve.

Selling pressure has eased, and high yields have increased the attractiveness of asset allocation.

The renewed inflow of funds into ETFs indicates that, following the sharp correction in September, some investors are beginning to refocus on municipal bonds. Yields rising to multi-year highs have also enabled new market entrants to obtain higher coupon returns, prompting some asset management firms to emphasize the investment value of municipal bonds.

However, the short-term rebound does not mean that interest rate risk has subsided. High yields will, on the one hand, push up financing costs for state and local governments, and on the other hand, mean that the prices of existing bonds remain vulnerable to interest rate fluctuations.

The market's future performance will still depend on inflation trends and the Federal Reserve's policy path. As long as inflationary pressures and the risk of further interest rate hikes persist, the municipal bond market will find it difficult to completely escape upward pressure on interest rates; if interest rates stabilize, the current higher yields may further attract allocation funds.

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