Municipal Bonds: Ongoing Rally in Munis

This Municipal Bonds sector report is excerpted from the First Quarter 2024 Fixed-Income Sector Views.

After a fairly dismal performance for much of 2023, municipal bonds took off during the fourth quarter. High all-in yields, a decline in net par outstanding due to large principal and interest reinvestment, and change in rate expectations all combined to drive buyers back to the market.

The strength in the market left municipals entering the first quarter with municipal/Treasury yield ratios at three-month and 12-month tights, while all-in yields have dropped by nearly 100 basis points since October. Secondary trading volumes are lower year-over-year, and demand exceeds supply. In this environment, market participants are reluctant to transact at current levels in the secondary market, and are instead waiting for a rebound in new issuance to reset valuations.

Some 86 percent of the record-setting fourth quarter return came from price appreciation, with the balance from coupon. Given the starting valuations in 2024, we expect coupon to drive the bulk of municipal market performance over the next few months. Muni/Treasury ratios should move incrementally wider on the back of new issuance, but we believe all-in yields are sufficiently attractive to keep retail buyers engaged and prevent a major valuation reset. On the credit front, revenue trends have decelerated and more states are reporting intra-year deficits. Some of the slowdown can be attributed to tax cuts enacted in the last two years. For example, 25 states have cut personal income tax rates since 2021—including 14 states that will see lower rates in 2024—and 19 are holding some version of a sales tax holiday this fiscal year.

Many states are required to balance their budgets, and their elevated rainy day funds will help them operate comfortably through a couple years of flat to slight declines in tax collections. However, we are keeping an eye on how reduced state appropriations affect smaller municipal entities such as local governments, which tend to have less budgetary flexibility. For now, defaults remain manageable. Although the total defaulted par amount rose by 29 percent to $2 billion in 2023, more than half of those came from the historically risky nursing home and hospital sectors. We are cautiously watching market technical conditions develop as we evaluate attractive entry points for higher-quality credits.

—By Allen Li and Michael Park

Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Investing involves risk, including the possible loss of principal. In general, the value of a fixed-income security falls when interest rates rise and rises when interest rates fall. Longer term bonds are more sensitive to interest rate changes and subject to greater volatility than those with shorter maturities. During periods of declining rates, the interest rates on floating rate securities generally reset downward and their value is unlikely to rise to the same extent as comparable fixed rate securities. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors, LLC.

©2024, Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC.

GPIM 60479

VIDEOS AND PODCASTS

 

Are Fixed-Income Investors Being Compensated for the Risks They Are Taking?

Maria Giraldo, Investment Strategist for Guggenheim Investments, joins Asset TV’s Fixed Income Masterclass.

×

Are Fixed-Income Investors Being Compensated for the Risks They Are Taking?

 

Macro Markets Podcast Episode 59: Finding Value Now in ABS, MBS, and CLOs (Plus Listener Mail)

Karthik Narayanan, Head of Structured Credit, joins Macro Markets to discuss what makes the sector an important component of our actively managed fixed-income portfolios and where we are finding value now.

×

Macro Markets Podcast: Episode #59