Why is municipal bond stock behavior virtually the same, regardless what state or fund you look at?

For example, one can look at shares of the following mutual funds, each collecting municipal bonds from Maryland, Michigan and California respectively: MDXBX, FMHTX, BCHYX.

One would think that bonds from these different states should have nothing to do with each other, yet the share price fluctuations are virtually the same, regardless what period you look at.

There has to be a simple reason behind this, but what is it?

  • 1
    The primary mover of similarly structured bonds would be interest rates. Aug 20, 2020 at 19:16

1 Answer 1


Municipal bonds have relatively low risk of default, since they are often backed by tax revenue or revenue from specific projects (e.g. a toll road), so their yield is usually similar regardless of the state/city/etc. that issues it.

Historically they have run fairly close to federal bond yields of similar duration, but the COVID crisis has enhanced the risk of municipal bonds over the past few months such that municipal bonds have gotten slightly higher yields. That's why you see a drop in these funds in mid-March followed by a slow recovery.

Individual areas can have some credit risk, but it's generally for short periods of time (unlike a company that goes bankrupt and never pays back the debt that is discharged). Municipalities can also issue bonds that have conditions such as optionality and conversions that can enhance yields, but for a broad bond fund those should be exceptions and shouldn't have a large impact on the fund performance.

In other words it's not like California bonds are "safer" than Maryland or Michigan bonds, or other states in general, so there's not much difference in the yields by state overall.

  • Thanks, I understand your point, but the movement of the tickers I specifically mentioned is EXACTLY the same. There has to be a particular underlying quantity that these share prices follow closely, but which one? For example the 30 Y treasury yield is always inversely proportional to the share price of of any mutual fund holding long treasury bonds. Is there something similar for muni bonds?
    – Hammerhead
    Aug 20, 2020 at 19:27
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    I wouldn't say EXACTLY the same - there are small differences, but the overall shape is very similar. The price of a muni fund should be roughly inversely proportional to treasury yields also.
    – D Stanley
    Aug 20, 2020 at 20:01
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    Look at a longer history and read my addition. They've trended with treasury yields for many years but dipped in March and have been recovering closer to treasuries since.
    – D Stanley
    Aug 20, 2020 at 21:04
  • I'm not sure how else to say it - there just isn't much difference in mutual bond yields based on state alone. Other than the extraordinary period from mid-March to mid-July, the yields have followed treasury yields pretty closely.
    – D Stanley
    Aug 20, 2020 at 21:27
  • I'm confused by your last comment - your question claims that the prices are (nearly) identical but now you're saying the returns are very different?
    – D Stanley
    Aug 20, 2020 at 21:29

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