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.
VANECK
By Michael Cohick, Director of Product Management
MAY 4, 2024