- We believe municipal bonds boast several key factors that position them as an attractive asset class in general, but especially so when markets are volatile
- Structural resilience has helped the municipal bond market offer attractive stability and credit strength
- Attractive after-tax income potential and current yields offer potential advantages during a time when future rate changes are uncertain.
Municipal bonds had a tough 2022. But 2023 is looking much better and that makes us optimistic about the potential benefits of considering this asset class for client portfolios.
Inflation has begun to moderate, and yields declined sharply in January, which supported the municipal bond market to start the year. The Bloomberg Municipal Bond Index rose +2.9% in January while municipal bond funds saw their first positive inflow month since June 2022 and second since January 2021*.
This is a welcome rebound from 2022, in which the index ended -8.5% lower than the start of the year, recording only the 7th negative year since 1980 and the 2nd worst on record. Additionally, municipal bond mutual funds experienced their largest-ever annual outflow of -$119 billion, more than doubling the previous record set in 2013 (-$58 billion)*. While mainly driven by inflationary concerns and the fear of rising rates, tax-loss harvesting may also have played a significant role as investors scrambled to create tax assets within their portfolios.
Understanding that volatility is likely to continue, we believe municipal bonds have a more attractive outlook than their taxable bond counterparts and could be worthy of consideration for your clients.