Market Signals by LPL Financial · Oct 6, 2026 · 29m · 15m saved
With David Hammer, Managing Director and Head of Municipal Bond Portfolio Management at PIMCO
The Bloomberg Municipal Bond Index lost 4.4% in September, its worst month since 1987, and was one trading day from its worst since May 1984. Its yield reached the highest level since 2001, apart from a brief stretch in 2008.
Investors have been asking whether something broke in the bond market. David Hammer said the sell-off came from interest rates and a lack of buyers, not from weaker credit, and that it left munis offering about the highest yields of his more than 20-year career.
"It has been a painful month for muni investors just on the rate move, but the opportunity set that it's created is pretty exciting." — David Hammer
David Hammer, Managing Director and Head of Municipal Bond Portfolio Management at PIMCO, on Market Signals by LPL Financial, is lead portfolio manager on PIMCO's municipal bond funds, including its investment grade, high yield, state-specific, closed-end and interval funds, and oversees its separately managed account strategies.
The full interview is covered here so you can skip it. 29 minutes of audio, 14 minutes of reading.
Here are the 13 arguments that matter.
Key Takeaways
September was a liquidity and interest-rate problem, not a credit problem, Hammer and the host agreed
Investment grade munis yield about 4.70%, equal to a little under 8% on a taxable bond
A portfolio with some credit risk can earn 5% to 6% tax-free, or 8% to 10% taxable-equivalent
State and local tax collections are 40% to 50% above their pre-pandemic peak
2026 is the last year of federal pandemic relief, and some BBB to low-A issuers face record deficits
High-yield munis pay record-low extra yield while defaults rise; senior living is the worst sector
Dealer inventories have fallen from $50 billion to $60 billion before the financial crisis to $10 billion to $15 billion, and Citigroup has left the business
Even if the 10-year Treasury yield reached 6.5%, Hammer thinks high-quality munis would probably still return slightly more than zero
10- to 15-year A-rated munis yield 4.5% to 5%, about 90% of a 30-year muni's yield with much less interest-rate risk
1. A Painful September
The host, LPL Research's chief fixed income strategist, said September is usually a weak month for munis, but this one was far worse than usual.
Hammer said munis usually do better than taxable bonds when rates rise
"Muni indices, they actually tend to outperform taxable fixed income." — David Hammer
The reason, he said, is that tax-free income is worth more relative to taxable income when interest rates are higher.
This time a shortage of buyers pushed prices too far
Munis fell much further than taxable bonds, he said, because the market had no liquidity, there was heavy macro volatility and a lot of new supply, and US retail investors were pulling money out or adding less than usual.
"The muni market went from outperforming taxable fixed income to underperforming the Barclays Agg by a couple percentage points year to date." — David Hammer
