It’s been a case of one step forward, two steps back for municipal (muni) bond investors this year. What started out as one of the best January’s in recent memory for munis, quickly turned into one of the worst February’s on record. And monthly returns have been uneven since. So, what can muni investors expect the rest of the year? Some thoughts:
Bottom Line: While munis have outperformed a number of taxable fixed income markets this year, after the historically bad year last year, it probably hasn’t been the year (so far) that many muni investors had hoped for. But, with the Fed close to the end of its rate hiking campaign, we could see a smoother path for munis in the second half of the year. Despite a slowing economy, fundamentals are still strong compared to history. And while tax revenues may have peaked, high cash balances and reserves should allow most issuers to adapt to an economic slowdown. Total yields remain above longer-term averages and since starting yields are the best predictor of future returns (over longer horizons), we think the prospects of solid returns for munis have improved (no guarantees of course).
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