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:
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.
Source: Federal Reserve, as of Sept. 18, 2024.
Source: Bloomberg LP., as of Sept. 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.
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While the muni market hasn't performed as expected, the pullback may have created an interesting entry point for investors before the historically strong seasonal period.
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Important information
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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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