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Municipal Bonds

Taxable municipal bonds: prepared for a rally

Daniel J. Close
Head of Municipals
Kristen M. DeJong
Portfolio Manager
Andrew J. Luberto
Client Portfolio Manager
3Q taxable municipal bonds commentary

Taxable municipal bond market returns finished slightly negative during the second quarter. Low new issue supply and improving demand narrowed spreads, but volatile U.S. Treasury yields weighed on performance. Nevertheless, taxable municipals have gained positive momentum, offering an attractive entry point to investors.

Key takeaways


Higher yields are driving returns

We see several factors driving third quarter performance. First, taxable municipals should continue to be buoyed by strengthening demand alongside ample coupon and reinvestment dollars, in tandem with slower issuance. While issuance is likely to increase compared to the first half, we do not anticipate it will outpace demand. Higher borrowing costs and record reserves should keep borrowing needs muted.

Second, inflation appears to be normalizing and should provide more stability for investors. As clarity emerges regarding the end of U.S. Federal Reserve (Fed) rate hikes, investors look toward the taxable municipal market’s attractive valuations to add duration while providing additional income.

Credit fundamentals remain strong due to historic revenue collections in the wake of the pandemic. While municipal revenue collection has peaked from post-covid highs, strong reserves make municipal bonds well positioned to weather an economic slowdown driven by higher interest rates. Despite this, we believe credit selection will continue to grow in importance as tighter economic conditions put pressure on specific names.

Finally, the positively sloped taxable municipal credit spread curve and strong fundamentals should provide a positive investment experience for intermediate to long-term credit during the third quarter and beyond. After a painful 2022 and a volatile yet positive start to the year, we expect bond activity to return to historic norms for the remainder of the year, underpinned by income and strong balance sheets.

We believe our bottom-up, fundamental credit research process is well-positioned to take advantage of the opportunities we are seeing in the market today.

Economic environment
Municipal market environment

Full report

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