Significant interest rate volatility marked the second quarter of 2024, driven by changing investor expectations for Federal Reserve (Fed) policy. The Fed left short-term interest rates unchanged and maintained its commitment to a 2% inflation target.1 When the quarter began in April, bond yields climbed as discouraging inflation data suggested the Fed was likely to delay any rate cuts; however, inflation cooled in June, which led many market participants to anticipate a mid-September rate cut. Against this backdrop, high yield munis posted a gain of 2.59%, outperforming the -0.02% return of investment grade munis and the 0.19% return of taxable munis.2
Key takeaways:
Given steady new high-grade issuance, low high-yield issuance, and a possible Federal Reserve rate cut before the end of 2024, we expect high absolute yields, strong fundamentals, and investor migration out of cash to present positive opportunities for municipal bonds.
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Source: Federal Reserve, as of June 12, 2024.
Source: Bloomberg, as of June 30, 2024. Investment grade municipal bonds are represented by Bloomberg Municipal Bond Index. High yield municipal bonds are represented by Bloomberg Municipal High Yield Bond Index. Taxable municipal bonds are represented by the Bloomberg Taxable Municipal Index.
Source: NASBO, as of June 18, 2024.
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Important information
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Header image: Guille Faingold / Stocksy
All fixed income securities are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/ or repay the principal on its debt. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.
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