US municipal bond quarterly market recap and outlook

Third quarter 2024 recap

The quarter was marked by shifting investor expectations about the timing and scope of the Federal Reserve’s (Fed’s) long-awaited easing cycle. When the quarter began, it was widely expected to keep rates steady until November, largely because of discouraging inflation data during the spring. June’s cooler inflation numbers, however, changed the calculus for some market participants. Interest rates fell, as investors speculated on the size of a potential September Fed rate cut. Fed officials lowered short-term interest rates by 50 basis points (bps)¹ at their September 18 meeting and set the stage for further rate cuts through the end of the calendar year.

In this environment, municipal bonds posted solid gains. Investment grade municipals returned 2.71%, while high-yield municipals returned 3.21%.² Taxable municipal bonds, which tend to be more sensitive to trends in the US Treasury market, returned 5.42%.² Investment grade, high yield, and taxable municipal bonds returned 2.30%, 7.48%, and 5.33%, respectively, year to date.² Investors generally favored lower credit quality bonds, which may have contributed to the outperformance of high yield municipals in both the quarterly and year-to-date periods.

Key takeaways:

• Municipal yields fell in the third quarter, pushing up municipal bond prices, as the Fed began lowering the fed funds target rate.
• Municipal supply increased significantly, as previously planned issuance was pulled forward in advance of the November presidential election.
• Appetite for municipal bonds was strong, with investors seeking to lock in attractive yields ahead of additional rate cuts by the Fed.
• Municipal credit quality remained solid, as state and local governments worked to mitigate the impact of a slowdown in revenue growth.

Our outlook

With one or more Fed rate cuts likely before year-end and the potential slowing of new issuance post-election, we expect high absolute yields, strong fundamentals, and investor migration out of cash to create positive opportunities for municipal bonds.

Read the complete quarterly update.

Learn about our municipal bond funds.