By Paulo Trevisani

Bonds issued by highly graded institutions such as Harvard University and New York City have experienced a bumpier-than-usual trade this year, even though their fundamentals haven't changed, analysts say.

Overall, politics are spurring price gyrations in the normally staid municipal bond market, forcing portfolio managers to convince investors that political tensions don't necessarily reduce the credit worthiness of most top-rated issuers.

Municipal bonds can be very susceptible to political noise as they are mostly held by individual investors. Munis "tend to overshoot to the upside and the downside," said Neil Sutherland, fixed income portfolio manager at Schroders.

Harvard saw the yield on a 10-year bond it issued in April 2024 jump higher relative to the MMA Yield Curve, a benchmark for top-rated munis produced by research firm Municipal Market Analytics. The yield, which rises as bond prices fall, was as high as 33.4 basis points above the benchmark in June, when the college was under pressure to negotiate a deal with the Trump administration to rein in antisemitism, among other issues. It has since partially recovered.

Matt Fabian, a partner at MMA, said the administration's tug-of-war with colleges prompted portfolio managers to ditch the otherwise safe bonds, in some cases just to avoid anxious questions from investors who hold munis to stay away from trouble. "If your client is anxious about something that they hold then that's not a typical muni bond," Fabian said. He added other high-quality munis have moved away from the benchmark. "Some of the Ivy League schools have definitely come at wider spreads," he said.

Something similar happened to a 10-year, 5%-coupon bond issued by New York City. The city is a Democrat stronghold with local laws protecting immigrants, a combination attracting Trump's ire. The AA-rated security has been unusually volatile this year and the spread versus a widely used benchmark widened by 12 basis point this year through Oct. 26, while spreads on similar bonds overall have narrowed by four bps against the same gauge, said Margot Kleinman, head of municipal markets research at Nuveen.

"There's a lot to think through and there's a lot of noise out there and so you are seeing that reflected in the market," Kleinman said, citing the New York City bond as an example. "There has been some spread widening this year."

She added that bond issuers with strong credit profiles such as New York are unlikely to see their fundamentals deteriorate in face of federal policies. Kleinman believes munis in general will perform well in coming months.

Muni markets were roiled in the first half of this year by fears that Trump's tax and spending bill would end up reducing their tax-exemption status. When the bill was signed into law in July, the exemption was preserved, triggering a relief rally.

Politics-related volatility this year has helped weaken the dollar and hurt demand for long-term Treasurys. Despite the turbulence, demand for munis remains healthy, overall. The JPMorgan Municipal ETF, which holds bonds from various states, saw net inflow increase drastically, to $1.8 billion this year as of Oct. 30 from $239 million a year earlier.

"We don't anticipate that [federal policies are] going to have a material impact on the credit fundamentals," Rockefeller Asset Management's Alex Petrone said. "Generally speaking, municipalities have their house in order."

Petrone said headline-driven volatility could be a cue for portfolio managers to go bargain hunting. "That can become an opportunity," she said.

Outstanding munis amounted to $4.3 trillion as of the second quarter, according to Sifma, a Wall Street trade group. Issuance this year is on path to surpass the $513.6 billion all-time high seen in 2024. Munis are issued by an estimated 50,000 entities, according to the Municipal Securities Rulemaking Board.

This year's events could have long-term implications as Washington cuts funding to colleges and Democrat-run states, and more broadly trims outlays for health care and disaster relief.

The "posturing of the federal government" is something that credit-rating agency KBRA is "considering more now than we had to a year ago," said Doug Kilcommons, head of the firm's public finance ratings group, adding that political factors haven't led to downgrades so far.

Brian Therien, a senior fixed-income analyst at Edward Jones, said he is watching sectors targeted by the administration, but has yet to see a reason to change investment strategies. He is more worried with small hospitals and colleges that aren't directly targeted by the administration, but are vulnerable to potential interruptions in federal outlays stemming from new policies.

The uncertainty caused by this year's fast changes in federal policies mean that, going forward, local governments will have to "just take care of their own capital programs," issuing munis or otherwise finding alternatives for shrinking federal outlays, said Frances Lewis, managing director at MacKay Municipal Managers. "Information coming out from the federal government is so volatile right now."

(END) Dow Jones Newswires

October 31, 2025 15:56 ET (19:56 GMT)

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