Investors pulled about $1.8 billion out of the municipal bond market this week, with returns for state and local government debt on track to tumble for the third consecutive month. The outflows for the week ending Wednesday are the largest since April 2025 and break a 21-week streak of inflows in muni funds, according to a JPMorgan note. The exodus was largely driven by open-end funds, bank strategists said, ETFs also experienced outflows.

Concerns over inflation, rising Treasury rates and heavy new issuance have pressured the muni market. September’s volatility has pushed year-to-date muni returns down roughly 1.7%, a Bloomberg gauge showed. "When that price stability erodes, you start to see people liquidating their municipal bonds," said Jeffery Timlin, lead portfolio manager for Sage Advisory Services’ municipal strategies.

Historically, periods of negative returns that result in outflows have proven favorable for investors looking to deploy capital, Timlin said. US state and local government bonds are hovering near their cheapest levels relative to Treasuries in a year. Ten-year municipal benchmark debt offered about 74% of the yield on similar Treasuries as of Wednesday. "If you’re focused on yield, this is probably as good of a time as any to buy in the last 10 to 20 years," Timlin added.

Still, there could be more pain ahead. James Pruskowski, managing director at Hennion & Walsh, said bids-wanted lists were getting hit hard recently so "you had a sense money was moving and outflows could be next." The amount of bonds out for bid surged to about $2.5 billion, the highest since April 2025. "We have some challenging months ahead and these outflows cycles are rarely one and done," Pruskowski said.