Muni Monthly: October 2024

Municipal bonds experienced a rise in yields in October 2024, aligning with an overall increase in Treasury yields due to stronger-than-expected employment, inflation, and consumer sentiment data. Despite the sell-off in fixed-income markets, municipal bonds outperformed Treasuries, supported by robust demand and improved valuations, culminating in a -1.46% return for the Bloomberg Municipal Bond Index. Longer-duration and lower investment-grade securities were notable outperformers amidst the rate hike.

Municipal supply surged to its highest level of the year, with a 68% increase from October 2023, totaling $65 billion. Year-to-date supply reached $444 billion, marking a 44% year-over-year increase. Tax-exempt issuances dominated the market, while demand was buoyed by significant inflows into municipal mutual funds, following a Federal Reserve rate cut. This demand was particularly strong in long-term and high-yield categories.

Municipal default rates remained low compared to corporates, bolstered by strong economic data. Moody's reported minimal defaults, continuing a trend of stability in the municipal sector. However, challenges such as lower growth rates and potential reductions in federal aid were noted as areas of concern.

Valuations indicate that municipals offer attractive after-tax income opportunities, with yields providing a significant pickup over taxable counterparts. The Bloomberg Muni Bond Index's yield-to-worst stood at 3.66%, translating to a 6.18% taxable-equivalent yield for investors in the highest tax brackets. This highlights the compelling value municipals offer across various rating cohorts, particularly in longer and lower intermediate-grade sectors.