The old adage that investing in municipal bonds is as exciting as watching paint dry is still true.

Amid the recent turmoil in the banking sector, however, it’s become a saving grace.

Investors anxious over the demise of Silicon Valley Bank, the takeover of Credit Suisse and uncertainty permeating numerous other banks see the dull but dependable municipal bond market as a welcome – and lucrative – balm.

Upon Silicon Valley Bank’s collapse, an analyst told The Bond Buyer last week, the government’s intervention “sent bonds soaring in a flight-to-quality fashion on steroids.”

Longtime investors aren’t surprised.

Well before the turbulence, recent reports on the robust health of issuers (“The Ballast Behind the Muni Market”) have buttressed investor confidence and sent them streaming into the market.

Rising short-term rates, lower long term

In addition to a flight to quality, we’re also seeing another phenomenon unfold in the bond market – a shift in yields. Yields on short-term bonds are edging up while longer-term bond yields are easing.

As we described earlier (“What’s Behind Rising Muni Yields”), this is the expected result of consistent rate hikes by the Federal Reserve Board designed to cool the economy.

Additionally, fallout from the banking crisis is also likely to further tamp down the economy, as banks, particularly smaller ones, tighten credit.

Banks and their bonds

Meantime, some analysts think the volatility in banking may force institutions to sell their municipal holdings and use the proceeds to strengthen their balance sheets.

As is often the case in events unrelated to credit quality, that could present investors with an opportunity.

As Nuveen put it: “Banks would be selling to raise liquidity to meet customers’ withdrawal demands. With excess cash on the sidelines waiting to be invested, we would see any municipal sell off as a potential buying opportunity.”

Sound familiar?

As recently as last year, investors fearful over inflation concerns – not credit-quality worries – fled municipal bond mutual funds, creating an outstanding opportunity for buyers (“When Sellers Present Buyers with a Muni Opportunity”) that persists today.

Municipal bonds continue to perform

Many macroeconomic unknowns still remain. But accurately predicting the future isn’t necessary to succeed in the municipal bond market – and is doomed to fail in the long run anyway.

What we can say is that with uncertainty roiling other markets, municipal bonds continue to perform as they were originally designed, and savvy investors are taking advantage of them.