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Municipal Bonds Emerge Unscathed in Economic Whirlwind


Benjamin Hughes

April 3, 2024 - 18:25 pm


Municipal Bonds Hold Steady Amid Economic Uncertainty

Amid a tumultuous period for the bond market, which has seen some of its heaviest losses in years, there shines a glimmer of stability in the realm of tax-exempt debt. Investors in municipal bonds, also known as munis, received what passes for positive news in the current climate: during the month of March, their investments did not decrease in value.

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In a remarkable turn of events, the municipal bond market experienced no gains but also avoided any losses, achieving a flat return of exactly 0.00%. This stagnant performance may carry a significant message for both investors and market analysts, as they closely monitor economic indicators for any signposts indicating the Federal Reserve's next move. The decision on when to cut interest rates is particularly pertinent, as it can heavily influence whether these flat returns carry forward into the next period.

A Closer Look at Muni Performance

According to Pat Luby, a municipal strategist at CreditSights Inc., a noteworthy surge in tax-exempt issuance could invigorate the municipal bond market. Refinancing older Build America Bonds with tax-exempt debt has the potential to capture investor interest and, ideally, activate the market's "animal spirits." Part of March's unique outcome in municipal bonds — a return of 0.00% — has only happened once before since 1980.

However, munis lagged behind corporate bonds and Treasuries, both of which exhibited positive performance in the same month. A key point of interest for industry experts and investors has been the broader economic data. The first quarter provided a series of unexpectedly strong economic indicators while Federal Reserve officials maintained their projection for three interest-rate reductions in 2024. On a related note, Fed Chair Jerome Powell, during a statement made on a Wednesday, communicated the likelihood of initiating a descent in rates at some point within the year, though he was careful to state that they would not be rushed and would rely on the data at hand.

The Fed's Influence on Investor Strategies

This anticipatory stance taken by the Fed seemingly caused a hesitation among investors. The delay in rate cuts appears to have removed some of the impetus for aggressive buying in March that many were awaiting, suggests Luby. For further insights into the dynamics of March's muni performance, readers may refer to "Munis Put Up a Goose Egg for March, But Devil is in the Details."

March also saw issuers bring forth a slightly increased supply of new issues to the market, totaling an approximate $35 billion. Dan Solender, head of municipal debt at Lord Abbett & Co., highlighted that while these new bonds were generally well received by the market, they contributed marginally to a downtick in overall market performance. Year to date, the quantity of bonds sold has exceeded that of the previous year and is keeping pace with the 2022 trends, indicating a steady interest amongst issuers.

This could further be bolstered by the potential replacement of outstanding taxable Build America Bonds with tax-exempt debt. The municipal curve observed in March was characterized as a bear flattener, according to portfolio manager Sweta Singh from City Different Holdings. Singh pointed out that robust supply for the month was somewhat counterbalanced by seasonal tax-related selling and suggested that supply-demand dynamics would need to be observed closely in the upcoming period.

Supply-Demand Dynamics and Market Outlook

As the market marches on, the interplay between supply and demand will likely have an important role in shaping the future landscape of municipal bonds. Issuers are generating more bonds than they did last year and closely aligning with the issuance track of 2022. This activity indicates that the appetite for new tax-exempt bonds remains healthy despite the market's current conditions.

The municipal market's flat return is not just a numeric quirk but a reflection of broader economic forces and investor sentiment. With the bond market still struggling to recover from devastating losses, investors and analysts alike are keeping a keen eye on economic indicators that might hint at the Federal Reserve's future actions regarding interest rate cuts.

The Role of Economic Data and Fed Projections

Federal Reserve officials continued to hold their ground on their previously stated outlook involving three interest-rate cuts slated for 2024. Moreover, Fed Chair Jerome Powell's reiteration about the likelihood of starting to lower rates "at some point this year" adds another layer of complexity for market participants. These projections underscore the significance of incoming economic data, which will play a pivotal role in determining the Federal Reserve's eventual decisions.

"The delay of the first move by the Fed removes some of the incentive for aggressive buying in March that participants were probably waiting for," Luby stated. This observation points to a cautious approach from investors who may have preemptively braced for an earlier adjustment.

The Muni Curve and Investor Outlook

The yield curve of munis, referred to commonly as the 'muni curve,' underwent changes as well. A bear flattening, where short-term yields rise faster than long-term yields or long-term yields fall slower than short-term yields, was spotted by analysts, indicating a nuanced shift in the market’s temperature.

"Even though supply was robust for the month, the demand side was affected by seasonal tax selling," Singh observed. This interplay of seasonal tendencies within tax cycles and fresh issuances has been critical in understanding nuances in market moves.

Singh indicated the importance of observing the evolving supply-demand dynamics as pivotal in identifying market trends and formulating strategies. Hence, the months ahead will be closely watched by those involved in the municipal bond market.


As this delicate balance between market forces continues to play out, participants in the muni market are reminded that while the absence of loss might be regarded as a silver lining in an otherwise distressed bond market, the future holds many variables. Observers and investors alike will have to remain vigilant and stay informed regarding future market movements and the Federal Reserve's strategic decisions. Only time will tell how these complex economic interactions will affect the municipal bond market's trajectory.

William Selway from Bloomberg assisted in gathering insights for this comprehensive look at the current state of the municipal bond market.

For more detailed coverage on this topic, readers can access the original content on Bloomberg's website: Munis Put Up a Goose Egg for March, But Devil is in the Details.