The municipal bond market is currently absorbing a third consecutive year of record supply. While heavy issuance often signals credit stress, Scott Diamond of Goldman Sachs notes this volume simply reflects a return to baseline infrastructure investment, compounded by construction costs that have inflated by 20%. So far, the market is easily digesting the paper. Year-to-date inflows across mutual funds and ETFs have hit $65bn, completely ignoring the separate capital flooding into managed accounts.

This technical setup is creating massive pricing dislocations. With the municipal yield curve exceptionally steep and baseline yields sitting at multi-year highs, active managers are extracting heavy tax-equivalent returns. Diamond points to specific tactical allocations across the Goldman Sachs ETF suite. The GMNY portfolio recently secured a three-year US territory bond yielding 3.5%, delivering a near 7% tax-equivalent payout for New York residents. Further out on the curve, the GCAL fund captured a 20-year triple-B hospital paper yielding 5%. For the national GMUB fund, the team bypassed generic issuance to lock in a 10-year, 4.7% yield on a phase five residential special assessment district.

Source: Video - Munis Navigate Record Supply and Market Shifts