Active Management Will Drive Muni Returns in 2024

BlackRock’s municipal (muni) bond experts share their market outlook
and actions you can take to raise your portfolio’s potential in 2024.

After initial optimism at the start of 2023 spurred strong performance, munis subsequently struggled as the Fed continued its tightening policy, raising fed fund rates to 5.25%−5.50%, before pausing in September. The 10-year U.S. Treasury yield sold off, peaking at 5% in mid-October, and the Bloomberg Muni Bond Index was down by 2.30% on a year-to-date basis by late October.

However, falling inflation, weakening economic growth, and the prolonged Fed pause led to more dovish expectations for monetary policy — causing a strong interest rate rally into year-end (i.e., rates decline and prices increase). As a result, munis rallied sharply, with the Bloomberg Muni Bond Index posting a total return of 8.67% in November and December, bringing the full-year total return to 6.40%. Favorable technicals, backed by strong fundamentals, were key drivers of muni outperformance and pushed relative valuations to extremely rich levels by year-end.

Falling rates boosted performance late in 2023

Falling rates boosted performance late in 2023

U.S. economic data held up very well in 2023, supporting the Fed’s decision to raise rates higher. However, the Fed and markets now stand at a crossroads — between the end of a tightening cycle and the beginning of rate cuts — and the timing of this shift is nearly impossible to predict accurately. Looking ahead, we expect assumptions about the economic outlook will strongly dictate muni performance expectations. We believe the peak in rates is behind us, but we also believe the market is currently too aggressive in pricing in rate cuts, both in terms of timing and depth. We expect slowing but positive economic growth throughout 2024, with no deep recession. Around midyear, we believe the Fed is likely to begin a series of smaller, 25-basis-point “maintenance” rate cuts. Ultimately, we look for modestly lower rates by year-end, with several periods of volatility as monetary policy evolves, and the election comes into focus. We see limited upside for material price appreciation, given the current rich valuations, and anticipate another year of mid-single-digit total returns of 4%−6% for intermediate investment grade munis in 2024. We urge caution and patience to start the year and look for better buying opportunities late in the first quarter or early in the second quarter.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.