Munis Haven’t Rallied So Much in a Month Since Paul Volcker Ran the Fed

The last time the municipal bond market rallied so much, it was Paul Volcker — and not Jerome Powell — who was winning a war on inflation.

Fueled by growing speculation that the Federal Reserve has tamed inflation enough to start cutting interest rates next year, everything from Bitcoin to tech stocks to Treasuries have rallied sharply this month. For state and local government debt, it has been a particularly heady run: They’ve delivered a return of more than 5% in November, the best month since January 1986.

The swift, surprising surge has been enough to lift returns and erase losses. The Bloomberg muni index is now up nearly 3% for the year, a rebound from a loss of 2.2% at the end of October. Benchmark yields for muni bonds due in 10 years reached below 2.74% Wednesday, the lowest since mid August.

“It’s been a very good month,” said Cooper Howard, fixed income strategist at Charles Schwab. “The significance of the move is that it’s going to pull us back into positive total returns for the year and that will have implications for 2024.”

Fund Flows

The Fed — now led by Powell as chairman — began aggressively raising rates in March 2022, leading to the fastest pace of rate increases in 40 years. The central bank has yet to cut borrowing costs even as US inflation has broadly slowed this year. Traders and investors are increasingly expecting that this tightening cycle is at its end and the Fed may cut rates next year.

November Muni Surge