Q1 2024 saw shifts in the municipal bond market, with rising yields and increased issuance presenting new investment opportunities despite broader economic volatility.
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 And 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.
Important Disclosures
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 is 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.
ICE Board Municipal Index (MUNI) tracks the performance of investment grade tax-exempt municipal bonds.
ICE U.S. Treasury Index tracks the performance of U.S. dollar-denominated sovereign debt publicly issued by the U.S. government in its domestic market. Qualifying securities must have at least one year remaining to final maturity, a fixed coupon schedule and a minimum amount outstanding of $1 billion.
ICE Short AMT-Free Broad National Municipal Index track the overall performance of the U.S. dollar denominated short-term tax-exempt bond market.
ICE 1-12 Year Broad High Yield Crossover Municipal Index tracks the overall performance of the U.S. dollar denominated high yield long-term tax-exempt bond market.
ICE BofA US High Yield Index tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA US Taxable Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market.
ICE BofA US Broad Market Index measures the performance of U.S. dollar-denominated, investment grade debt securities, including U.S. Treasury notes and bonds, quasi-government securities, corporate securities, residential and commercial mortgage-backed securities and asset-backed securities.
ICE U.S. Treasury 3-10 Year Bond Index tracks the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than 3 years and less than or equal to 7 years.
ICE US Treasury 7-10 Year Bond Index tracks the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than 7 years and less than or equal to 10 years.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Taxable equivalent yields are used by investors to compare yields on taxable and tax-exempt securities after accounting for federal income taxes. TEY represents the yield a taxable bond investment would have to earn in order to match, after deducting federal income taxes, the yield available on a tax-exempt municipal bond investment. TEY = Tax-Free Municipal Bond Yield/(1 -Tax Rate).
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.
© Van Eck Associates Corporation.
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