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April 2024

Tax-Exempt Strategies:
Municipals Bounce but Stay the Course

Michael Taila Managing Director
William D. Black Managing Director

Key Points

  • Absolute yields tick higher, underscoring long-term value. 
  • Supply deficit and ample liquidity propel high-yield prices. 
  • Credit fundamentals benefit from extended economic glide path. 

Municipal bonds carefully confronted financial market volatility to deliver favorable relative performance to begin the year. Notwithstanding the whipsaw in rates, Bloomberg indices reported investment-grade (IG) municipal bonds posted a slightly negative return of 39 bps for the quarter, while high-yield municipals (HYM) rewarded their investors with a 1.5% total return. To give perspective, U.S. Treasuries closed out the first quarter in the red 96 bps. The comparatively strong showing of IG and HYM bonds is attributable to solid investor demand, as evidenced by positive net municipal mutual fund flows YTD of nearly $8 billion and the favorable impact of income accrual on fluctuating bond prices. Absolute municipal bond yields remain a linchpin to their value proposition for long-term investors seeking attractive tax-efficient cash flow and forward-return potential. According to Bloomberg indices, IG and HYM index yield-to-worst (YTW) settled at 3.5% and 5.5%, respectively, at quarter-end, translating into taxable-equivalent yields1 of 5.9% and 9.3%, respectively. Municipal bonds historically benefit from a lower correlation to other asset classes, which tends to reduce portfolio volatility over time, thus currently available yields offer a compelling entry point for investor portfolios.

Chart 1: Yield-to-Worst (YTW) for IG and HYM Bonds Remain Attractive

Source: Bloomberg, as of March 29, 2024.


All sources are Bloomberg indexes.

Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.



Technical factors often play a significant role in the price behavior of municipal bonds. Gross issuance reached approximately $100 billion during the quarter, or a 25% increase YoY. Despite the strong trend of municipal market supply, deal flow in the HYM space underwhelmed demand. The lack of traditional HYM supply has bolstered liquidity and improved secondary market trading conditions as product scarcity benefited security prices. Moreover, as the probability of an economic correction this year dissipates, HYM investors have become more comfortable with risk. Credit spreads, as measured by the YTW differential of the Bloomberg Municipal High Yield Index relative to the Bloomberg Municipal (IG) Index AAA and BBB YTW, have declined since the beginning of the year by approximately 40 bps and 15 bps, respectively. These trends are likely to continue in the near term; however, dislocation in the Treasury market or changes in expectations for Fed policy could have implications. With the perceived belief that the rate cycle has likely plateaued, longer-duration assets have garnered increased attention, contributing to the favorable first-quarter performance.

Chart 2: 1Q 2024 Fixed Income Asset Class Returns

Source: Bloomberg, as of March 29, 2024.

All indices used in the chart above are Bloomberg.

Past performance or performance based upon assumptions is no guarantee of future results. Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.




The resilient economy continues to underpin municipal credit conditions. Moody’s reported a third consecutive year of upgrades outpacing downgrades in 2023. Reserve funds of state and local governments remain at or near record levels, while many revenue enterprises have either reached or exceeded their pre-pandemic operations. Should budget performance decelerate or turn negative, most issuers are well-positioned to manage through a period of instability. Within HYM, troubled borrower activity remains in line with the quarterly experience of last year, with continued pressure in a few sectors, like senior living, albeit trends are beginning to improve in some regions. Credit selectivity, security structure, and sector orientation are key considerations in navigating the market.

1Taxable-equivalent yield – this is based on 37% marginal + 3.8% Medicare Surcharge  


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