Municipal Bond Market Outlook for 2024 | ETF Trends

By James Colby
Portfolio Manager and Strategist, Municipal Bonds
Tamara Lowin
Senior Municipal Credit Analyst
Michael Cohick
Director of Product Management

Find out how municipal bonds are projected to perform in 2024 in this market outlook report from the experts at VanEck.

The benefits of municipal bonds are well known. Amid economic uncertainties, these bonds provide a reliable source of income, making them attractive for risk-averse investors seeking some added security for their fixed-income portfolios. Additionally, municipalities’ essential role in infrastructure development further solidifies the attractiveness of investing in municipal bonds. The tax benefits associated with municipal bonds (such as interest income being exempt from federal taxes) always attract investors to the sector.

In 2024, Van Eck expects municipal bonds will offer a solid opportunity for total return correlating with our anticipated decline in yields for the year 2024. However, it is crucial to act swiftly, to take advantage of the expected changes in the market.

Key Takeaways:

In 2023, municipal ETFs, mutual funds and SMA platforms experienced notable outflows, though ETFs and SMAs ultimately ended the year with net positive flows. In 2024, there is promising opportunity for positive performance. The expectation is that more cash from these outflows will return to tax-exempt bonds, presenting opportunities for investors as market conditions improve.

The current market backdrop for municipal bonds is positive, with significant improvements compared to the recent past. Inflationary pressures have eased, attributed to the Federal Reserve’s successful tightening efforts, leading to a shift in positive sentiment back to fixed-income investing.

Municipal bonds stand out due to their attractive yields, which have not been witnessed since the 2008 financial crisis, making them appealing for investors looking for competitive taxable equivalent yields.

Yield History of ICE US Broad Municipal Index

Yield History of ICE US Broad Municipal Index

Source: ICE Data Services. As of 12/31/2023.


The string of successive rate increases in 2023 had a decidedly negative impact on all tax-free assets. As rates rose to match the increases by the Fed, the interest rate risk, as measured by duration, accelerated the price declines in fixed-income portfolios. Bonds were sold to avoid further losses, and the resulting cash ended up in money market equivalent vehicles. By October, most portfolios and indexes registered negative returns. However, in November, the Fed began to respond to signals suggesting that inflationary pressures were abating and that an end to higher rate moves might be at hand. The November fixed-income rally of 100 basis points was only matched by the rally of November 1982. The end-of-the-year performance numbers of municipal bonds evidenced an extraordinary turnaround. From short- to long-term portfolios, returns ended decidedly positive. The ICE US Broad Municipal Index (MUNI) ended the year up 5.99%, and the ICE Core High Yield and Unrated Municipal Index (MHLD) was up 8.83%.

2023 Municipal Bond Index Performance

2023 Municipal Bond Index Performance

Source: Morningstar. As of 12/31/2023.


The general market backdrop for municipal bonds has improved as we enter 2024. For example, the Fed’s indication of a gradual easing this year and a potential move towards lower rates should help reduce market volatility, aligning with longer-term trends observed during periods of lower inflation. In addition, despite the enormous rally of November, fund outflows in 2023 dwarf the inflows at the end of 2023, although notably ETFs and SMAs ended the year net positive for the year. As a result, the stage is set for a more optimistic outlook for 2024, underscored by two primary components: attractive yield and reduced volatility.

Attractive Yields

Like all fixed income, yields for municipal bonds have reset higher after a decade-long run of extraordinarily low rates. Entering 2024, yields across all municipal sectors and parts of the municipal yield curve have not been this attractive since the 2008 financial crisis. If investors have heretofore been reluctant to add to fixed income, they should turn their attention to municipals in 2024, which offer taxable equivalent yields that easily compete with other asset classes.

Reduced Volatility

Although the Fed has recently expressed the view that higher rate moves may no longer be needed, it has also signaled that it continues to monitor the need to move rates lower to forestall an economic contraction. The historic one-month move to lower rates in November likely means that any Fed initiative to push short rates lower will not trigger sharp moves of the November magnitude. We should anticipate a gradual easing by the Fed along with a similar response by the municipal market to normalize the yield curve and head to lower rates. The ensuing more modest market volatility will be consistent with longer-term trends observed in past periods of lower inflation, allowing investors to pursue municipal investment strategies with more confidence.

Potential Performance Ranges for Municipal Bonds

Between these current measures by the Fed and its recently expressed views, 2024 should produce returns consistent with other historical periods of ebbing inflation and healthy economic activity. We expect the return state and local governments to the municipal capital markets to fund their programs and offer asset managers a broader variety of products for their clients. For investment-grade portfolios, this anticipated stability should offer a slight premium return above the coupon income rate of 5%. For the high-yield investor, returns of 2-3% above investment grade are certainly possible, but with new issue supply still at sub-normal levels, and overall default experience remaining low the continued healthy demand will make significantly higher rates more difficult to achieve.


While the outlook for municipal bonds has certainly improved, this does not mean the market is without risks. Without consensus on rate movement in 2024, investor trading strategies will be more diverse. Combined with continued post-COVID struggles in many sectors and an increase in supply that will not sufficiently feed the demand, these are the factors investors should monitor as potential catalysts for pockets of volatility in the municipal space:

Sectors to Monitor

Sectors pressured in 2023 are unlikely to see relief in 2024 as the stressors on industrial development and health-related (over 55% of 2023 defaults) continue. Hospitals, not typically considered as risky a sector as their senior living counterparts, remained challenged with inflation, staffing shortages, and insufficient Medicaid reimbursement levels in select states. As a sector, hospitals are relying heavily on historically high reserves to unsustainable levels. As reserves decline and margins are squeezed, hospitals at all rating levels will show signs of distress as they miss covenants. While we do not expect mass defaults from hospital borrowers, the strain will continue in 2024, and we expect restructurings to increase.

Slowing Economy

As the Fed attempts to thread the needle and orchestrate the so-called “soft landing,” investors should consider the prospects for municipal bonds if economic growth slows. Historically, municipal credit quality is not immediately impacted by a slowing economy. Although job losses result in declines in tax receipts, like income and sales taxes, most bonds secured by these revenue streams can withstand significant declines before experiencing an impact on credit quality. Overall, airports are one of the first sectors to feel the fiscal pinch of slower economic growth, and local governments relying upon property taxes are the last. But note that both sectors rarely see impairments.

Further, by the time property taxes are impacted, the economy is usually on an upswing, and both business and recreational travel have fully recovered. Established credits can usually withstand a slowing economy. For new projects and expansions, careful scrutiny is appropriate on an individual basis.

Keep an Eye on Municipal Issuance

Overall, we expect municipal issuance to increase this year. As borrowers run out of COVID funds and become more comfortable with the higher borrowing rates, deferred projects will come to market. Any increase in new issuance will likely be concentrated in investment-grade borrowers, with high yield seeing a more modest rise.

While we expect refundings to increase somewhat, the added volume will be concentrated in sectors and credits that are valued over the long term despite current struggles. For example, with more mergers and continued struggles in healthcare and hospitals, new debt will reflect an affiliation and/or reduce the near-term debt service burden. These bonds are more likely for facilities in need of additional cash now but expected to regain stability in the longer term. Regardless of the sector though, we anticipate demand still outpacing supply.


In 2023, persistent volatility and pervasive negative sentiment posed challenges. Despite this, bonds have performed well, exceeding initial expectations with positive returns across the yield curve as well as in high yield. Reflecting on the year, we acknowledge the positive performance in 2023 but anticipate a narrowing window of opportunity. As growth decelerates, inflation stabilizes, and the possibility of rate cuts looms, we urge investors to seize the current elevated yield environment. We predict a downward trend in yields for 2024, pointing to a potential total return opportunity. Time is of the essence, and we advocate for proactive measures to capitalize on the anticipated market shifts.

Originally published by VanEck on February 2, 2024. 

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Index Definitions:

ICE US Broad Municipal Index (MUNI): tracks the performance of US dollar denominated investment grade tax exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market.

ICE Core High Yield & Unrated Municipal Index (MHLD): tracks the performance of U.S. dollar denominated high yield tax exempt debt publicly issued in the U.S. domestic market by U.S. states and territories as well as their political subdivisions.

ICE BofA US Municipal Bond Index: The ICE U.S. Municipal Bond Index Family includes USD denominated, fixed rate, tax exempt bonds.

The S&P Municipal Bond High-Yield Index: consists of bonds in the S&P Municipal Bond Index that are not rated or are rated below investment grade.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

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