By Michael Cohick, Director of Product Management
The first quarter of 2024 brought some notable shifts in the municipal bond landscape, reflecting broader economic trends and market dynamics. Although interest rate fluctuations drove a slight decline broadly, investment-grade municipals held up better than most comparable quality taxable fixed income sectors, and high yield munis performed on par with high yield corporates. By the end of the quarter, we saw muni yields rising particularly in the short end of the curve, an increase in issuance and narrowing spreads, which may create buying opportunities for investors. The first quarter of 2024 brought some notable shifts in the municipal bond landscape, reflecting broader economic trends and market dynamics.
The ICE Broad Municipal Bond Index (MUNI) experienced a modest decline of -0.28% during this period, following a robust 5.99% return in 2023. This dip was primarily influenced by interest rate volatility, driven by stronger-than-expected economic data and inflation figures. Consequently, expectations for policy rate cuts in 2024 were pushed back, causing municipal yields to rise across the curve. Short-term yields saw a more pronounced increase compared to intermediate and long-term yields, resulting in a flatter municipal yield curve.
The changing outlook on policy rates also impacted the U.S. Treasury (UST) curve, albeit to a lesser extent. The term structure shift indicated a decreased risk premium for interest rates. Longer-dated bonds underperformed shorter-dated ones due to their higher interest rate sensitivity. However, A-rated and BBB-rated bonds outperformed among quality cohorts, as their higher yields helped offset the impact of rising rates.
Tax-Exempt Munis Surpass Comparable Taxable Fixed Income
In comparison to taxable fixed income indexes, investment grade munis outperformed the ICE U.S. Treasury Index and the ICE U.S. Aggregate Index. This outperformance was partly driven by differences in index level duration. Broad high yield municipals outperformed US high yield corporates in the first quarter. Investor demand for municipals improved, with municipal mutual fund net inflows of $10.4 billion compared to the previous quarter’s outflow of $16.6 billion. On the supply side, lower interest rates led to a 24% increase in year-to-date municipal bond issuance compared to the same period in 2023, with a notable decrease in taxable issuance.
Fixed Income Returns and Statistics
| Index | Index Name | Q1 24 Return | 2023 Return | Yield to Worst | Duration to Worst |
| Tax Exempts | |||||
| MUNI | Broad Muni | -0.28 | 5.99 | 3.31 | 5.11 |
| MBNS | Short Muni | -0.05 | 3.56 | 2.86 | 2.21 |
| MBNI | Intermediate Muni | -0.32 | 6.03 | 3.05 | 5.10 |
| MBNL | Long Muni | -0.58 | 8.52 | 3.91 | 7.94 |
| MIHX | Short High Yield Muni | 1.53 | 5.55 | 4.77 | 3.85 |
| MHYX | Broad High Yield Muni | 1.95 | 7.91 | 5.09 | 7.44 |
| Taxables | |||||
| H0A0 | US High Yield Corporate | 1.51 | 13.46 | 7.69 | 3.65 |
| C0A0 | US Corporate | -0.08 | 8.40 | 5.15 | 6.82 |
| DQTM | Taxable Muni | -0.38 | 8.35 | 4.99 | 9.50 |
| US00 | US Aggreate | -0.66 | 5.39 | 4.60 | 6.22 |
| IDCOT310 | US Treasury 3-10 Year | -0.77 | 4.13 | 3.91 | 5.06 |
| IDCOT7 | US Treasury 7-10 Year | -1.34 | 3.39 | 3.89 | 7.37 |
Source: ICE Data Services. As of 3/31/2024. MUNI: ICE US Broad Municipal Index, MBNS: ICE Short AMT-Free Broad National Municipal Index, MBNI: ICE Intermediate AMT-Free Broad National Municipal Index, MBNL: ICE Long AMT-Free Broad National Municipal Index, MIHX: ICE 1-12 Year Broad High Yield Crossover Municipal Index, MHYX: ICE Broad High Yield Crossover Municipal Index, H0A0: ICE BofA US High Yield Index, C0A0: ICE BofA US Corporate Index, DQTM: ICE BofA US Taxable Municipal Securities Index, US00: ICE BofA US Broad Market Index, IDCOT310: ICE U.S. Treasury 3-10 Year Bond Index, IDCOT7: ICE US Treasury 7-10 Year Bond Index. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
Rising muni yields made tax-exempts more attractive for prospective investors. The shift in relative value was most noticeable in the front-end of the yield curve. Tax-equivalent yields became more favorable compared to taxable alternatives, particularly for investors in higher tax brackets.
Municipal AAA & US Treasury Yield Curves
3/31/2024
Source: ICE Data. As of 3/31/2024. Past performance is not a guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
Credit spreads narrowed during the quarter, mirroring the broader asset rally at the end of 2023. This trend, especially among investment-grade categories, suggests room for marginal credit improvement. However, Moody’s Investors Service’s negative outlook for the U.S. credit rating remains unresolved, potentially impacting relative valuation measures and MT ratios.
HY Muni vs. IG Muni Index Yield Spread
12/31/2010 – 3/31/2024
Source: ICE Data. As of 3/31/2024. Yield spread is the difference between the yield to worst of the ICE Core High Yield & Unrated Municipal Index and the yield to worst of ICE US Broad Municipal Index. See end for index descriptions. Yield to worst is generally defined as being the lowest yield that a buyer can expect to receive. Past performance is not a guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
Strong economic data and the fundamental strength of municipalities support current credit spread levels and may indicate further spread tightening. While tax season historically affects investor demand for municipal bonds in the short term, any resulting spread widening could present buying opportunities. Moreover, the resolution of government funding issues and a favorable outlook for tax-exempt municipals reinforce long-term prospects despite expensive valuations relative to taxable alternatives, and investors in the highest tax brackets can still find value in tax-equivalent municipal bond yields.
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Originally published 29 May 2024.
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