Although it’s as difficult as ever to know where the economy is headed, one thing is clear: Municipal bonds are on a tear.
Prices, which move in the opposite direction of yields, have been rising since November.
Analysts attribute the upswing to favorable market conditions, including falling interest rates, slowing growth, moderating inflation and the Fed’s third consecutive pause in raising rates.
“The asset class further outperformed comparable Treasuries, as investors positioned for improved demand and a dearth of supply into the new year,” BlackRock said in a report.
Muni prices were strong despite relatively high issuance last month – $36 billion, 1% above the five-year average.
“However, supply was easily absorbed as investors raced to lock in high absolute yields as opportunities dwindle,” the report said.
Strong states’ reserves
Heading into the new year, the fiscal health of issuers we’ve discussed is expected to continue (“Boost for Another Large Muni Issuer”).
Moody’s reported that states’ fiscal reserves will likely dip in 2024 but stay near historic highs. The vast majority of states rated by Moody’s – 47 of 49 – are in the highest Aaa and Aa rating categories. Two states, New Jersey and Illinois, are rated A.
“The asset class is entering a favorable seasonal period and will likely benefit from limited supply over the next few months. In addition, an improved outlook for fixed income should strengthen demand and promote more consistent inflows in 2024,” BlackRock said.
Despite the dip in yields, investors are closing out the year savoring muni rates not seen in years.
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The demand should pick up “as people recognize this is an asset class that’s worth being in, whether it’s from the fundamental story, whether it’s the ability to lock in these rates, or that the tax advantage can help anybody, regardless of what tax bracket you’re in,” a Franklin Templeton analyst told The Bond Buyer.
The Fed has been on a mission to bring down inflation by slowing the economy. Is the mission accomplished? Is a recession, with its attendant lower rates, just around the corner?
We don’t know, and we don’t know anyone who does.
What we can see, however, are attractive yields available now for investors interested in keeping their interest clock ticking at these higher rates.