Municipal Midyear Outlook: Come on In, the Water’s Fine

With the highest yields in years, the muni bond market looks increasingly attractive.

After the worst showing in four decades in 2022, the muni market regained some ground in 2023. There was some chop along the way, but the Bloomberg Municipal Bond Index etched a 2.67% return through June 30.

As anxieties tempered toward midyear, investors gradually returned to the market. Most were attracted by strong muni issuer fundamentals, the likelihood the Fed is nearing the end of its rate-hike cycle, and historically high yields (Display).

Municipal Bond Yields Are at 12-Year Highs

Midyear Muni Strategies in an Improving Market

To us, this seems like a very compelling entry point for munis. Yet many investors remain parked in cash or cash equivalents, waiting to see what happens. Not only have they missed attractive returns compared to US Treasuries (munis have outperformed Treasuries since late 2022), but they’re now giving up significant potential returns. Here’s how we think they can take advantage of today’s environment.

Extend your duration target. As we see it, longer duration should be muni investors’ most powerful ally since we expect yields to be lower in 12 to 18 months.