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Municipal Bonds

Taxable municipal 2023 outlook: still cloudy but brighter days ahead

Daniel J. Close
Head of Municipals
Andrew J. Luberto
Client Portfolio Manager
cloud on sky with some sunrays

Key takeaways

2022 was sobering for taxable municipal bonds, with the market plagued by surging interest rates, pessimistic market sentiment and the glimmer of rebounds quashed by U.S. Federal Reserve  rhetoric.

Despite poor market performance, however, the underlying strengths of taxable municipal bonds have persisted. State government revenues and reserve funds remain strong, and investor demand is showing signs of outweighing supply. The year may have been tough, but conditions may be poised for improving market sentiment in 2023.

The end of the Federal Reserve's rate hiking program is within sight

All eyes will remain on the U.S. Federal Reserve (Fed) in 2023. The Fed funds rate has increased 375 basis points (bps) this year and we expect another 150 bps of hikes (+50bps in December 2022, +100bps in 2023), ending at a 5.25% terminal rate. Inflation will likely remain above the Fed’s 2% target over the course of next year, but there is growing evidence that it has peaked. We expect inflation will continue to soften, driven by declining energy prices and eventually by the stickier parts of inflation like lower housing costs and rents.

Once the Fed reaches its terminal rate, assuming inflation comes down, the Fed should be on hold for the balance of 2023. Current Fed funds futures estimate the Fed to begin cutting in 3Q23 because the risks of recession will be too hard to ignore. The expectations of an economic slowdown and potential pressure on the Fed to turn more dovish will keep interest rates contained on the long end of the yield curve, creating a more constructive environment for fixed income investors.

The odds of recession are increasing. We believe there is a greater likelihood of a recession in late 2023 as lagged impacts of Fed rate hikes are yet to be realized. An economic slowdown can push long rates lower, supporting high-quality, long-duration fixed income returns. The positive news is the Fed now acknowledges these recession risks exist. This acknowledgement, combined with the growing evidence of peaked inflation, supports the argument that the Fed will pause rate hikes by late 2023.


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Gross Domestic Product: U.S. Department of Commerce. Treasury Yields and municipal credit spreads: Bloomberg (subscription required). Issuance: Seibert Research. Defaults: Municipals Weekly, Bank of America/Merrill Lynch Research. State Revenues: The Nelson A. Rockefeller Institute of Government, State Revenue Report. State Budget Reserves: Pew Charitable Trust. Global Growth: International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD). Standard & Poor’s and Investortools: Flow of Funds, The Federal Reserve Board: Payroll Data: Bureau of Labor Statistics. Bond Ratings: Standard & Poor’s, Moody’s, Fitch. New Money Project Financing: The Bond Buyer. State revenues: U.S. Census Bureau.

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on Please note, it is not possible to invest directly in an index.

Important information on risk

Investing involves risk; principal loss is possible. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments. This information should not replace an investor’s consultation with a financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax professional regarding the appropriateness of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

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