Unmasking Muni Myths: Insights for Smart Investing

3 key takeaways:

• Investment speed in municipal bond portfolios does not equate to better outcomes.
• A higher yielding portfolio does not always mean better performance for a client.
• Using municipal bonds for tax-loss harvesting may help lower taxes, not just defer them.

People often hear claims such as ‘humans only use 10% of our brains’, we swallow spiders in our sleep’, or ‘that the liver can regenerate itself’, but most of these popular myths do not hold up to research. Of the examples above, only the liver’s ability to regenerate is true – so there is no need to lose sleep over spiders.¹

While social myths can stem from urban legend, myths about the bond market tend to stem from misinformation or an oversimplification of facts. BlackRock acts as a fiduciary on behalf of its clients, but we also strive to strengthen investors' understanding of the products in which they invest. Municipal bonds are widely viewed as a “sleepy” asset class due to their historically low market volatility, high credit quality and tax-free income, but that does not make them immune from misinformation or oversimplified narratives. While overall municipal market volatility has remained low, BlackRock expects interest rate volatility to persist in 2026 due to factors like AI-driven economic shifts, potential trade/tariff negotiations and the transition to a new Federal Reserve chair in May.

In this current environment, separating fact from fiction in the municipal market is becoming increasingly important, particularly as investors reassess long-standing assumptions about the implementation of municipal bonds in portfolios.

Myth #1: When investing in municipal portfolios, faster is always better

Truth: Speed to invest can benefit bond portfolios in certain market conditions, but not all. Getting portfolios invested quickly tends to be most advantageous during periods of abundant supply. In these environments, municipal bond prices typically soften and create attractive entry points.

When supply is scarce, flexibility can prove more valuable than speed. In these environments, selectively purchasing fairly priced, liquid and high-quality bonds become critical. Focusing on small lot trading with temporary pricing disparities can lead to faster initial implementation; the downside can be felt when an investor needs access to cash, and liquidity is strained due to the smaller inefficient lot sizes.²

A disciplined, supply-aware investment approach can help reduce concerns around temporary performance cash drag during the initial investment stage. Portfolios invested over 20 days (about 3 weeks) typically recover any initial cash drag relative to immediate investment within a month. Moreover, since 2022, portfolios of municipal bonds invested gradually over a 20-day period have outperformed those invested immediately by an average of 23 basis points across rolling one-year periods.⁴

Like most fixed income securities, municipal bonds have a direct relationship with interest rates, called interest rate risk. Municipal bond interest rate risk is the danger that rising market interest rates will decrease the market value of existing municipal bonds, making them less attractive compared to newer bonds with higher yields. The rate volatility experienced in early April of 2025 can be used as a recent example of how a focus on investing portfolios faster does not always benefit a client when specifically looking at an intermediate or long-term portfolio. The chart below illustrates the potential long-term benefits of investing gradually over 20 days vs investing on day 1, layered with the corresponding weekly muni supply.

Myth #2: When comparing strategies, higher yields lead to better outcomes

Truth: Yields are commonly used as guide for future performance, especially in fixed income, as it indicates potential return, helps compare investments, and signals economic outlook. However, it is not a guarantee and must be paired with other factors like market conditions, inflation, and credit quality for a complete picture. An overreliance on yield⁵ can also introduce unintended risks: higher-yielding bonds often generate more income yield⁶ and/or yield to worst⁷ by taking on added duration⁸ or credit quality risk.

Focusing on yield alone when comparing investment‑grade municipal bond strategies overlooks the most critical variable: overall portfolio risk.

Higher yields reflect greater risk, including higher default risk, but not necessarily higher total returns. Total return provides a more comprehensive snapshot of the portfolio’s performance, capturing all sources of value creation—including duration and curve positioning, income, price appreciation (or depreciation), and the effects of interest rate and credit movements.

Client portfolios should be positioned based on client risk tolerance and overall goals, not reliant on yields alone. Other factors such as duration, spreads9, and security selection play a role in the overall performance outcome.

Myth #3: Only equities offer meaningful tax-loss opportunities

Truth: Equities can certainly be used for tax-loss harvesting ; however, absent from a specific tax-loss harvesting approach there is a possibility that using equities can defer taxes as the new stock could appreciate creating future gains. While fixed income is not always viewed as a primary source of tax loss harvesting, it can deliver meaningful tax benefits for high-net-worth clients by enhancing after-tax returns and offsetting capital gains generated elsewhere in a client portfolio.

Municipal bonds offer a unique way to offset gains due to carrying a defined maturity date, unlike an equity that can be perpetual. Although tax-loss harvest opportunities are modest in most years, periods of heightened rate volatility can materially increase their impact. These outcomes can be achieved systematically or on an ad hoc basis. Systematic tax-loss harvesting is a continuous approach to maximizing tax alpha by capturing losses based on rules-based systems or algorithms. Ad-hoc tax-loss harvesting is the more traditional reactive approach for a client seeking opportunities to offset capital gains recognized across the client holdings in a given tax year.

Regardless of the method, there are ample loss harvesting opportunities in fixed income to help investors keep more of what they earn. The tax loss harvesting process allows investors to rebalance and potentially upgrade their portfolios by selling underperforming bonds and reinvesting the proceeds into similar securities with potentially better yields or credit quality. Due to the complexity of the rules and market dynamics, consulting with a financial advisor or tax professional is crucial to ensure the strategy aligns with specific financial goals and tax situations.

Municipal bond investing is often labeled straightforward, but the myths that surround the asset class can lead investors to overlook important nuances. Speed, yield, and tax‑loss harvesting are all meaningful components of a portfolio strategy—yet none should be evaluated in isolation. A disciplined, research‑driven approach helps investors avoid unintended risks, capture more consistent total returns, and make smarter use of tax‑efficient tools.

At BlackRock, we combine deep market expertise, systematic portfolio construction and a fiduciary mindset to help clients navigate these complexities with confidence. By cutting through the noise and focusing on fundamentals, we aim to empower advisors and their clients to make more informed decisions across all market environments. Visit our Fixed Income SMA page to learn more.