Municipal Bond Market Sees Pressure in First Half of 2024
The municipal bond market experienced significant pressure in the first half of 2024, with yields rising in response to increased new issue supply and directional movements in US Treasury rates. Despite a late-June rate rally, the market saw a decline in bond prices during the second quarter, leading to cheaper valuations compared to US Treasuries.
Reinvestment activity from coupons and maturing bonds provided some support to the demand backdrop, although mutual fund flows were sluggish during the second quarter, adding only $0.3 billion. The 10-year Muni/UST ratio ended the quarter near 65%, up from 61% at the end of the previous quarter.
Looking ahead, elevated rate volatility is expected as the election approaches, although historical data suggests that municipal returns have been mostly favorable during the fourth quarter of US election years.
In terms of performance, the Fund’s Class I shares returned 1.36% for the quarter ended June 30, 2024, outperforming the Bloomberg U.S. Municipal Bond Index, which returned -0.02% for the same period.
Security selection was a key contributor to relative performance, with credits in education, other health, and special tax performing well. Sector allocation also added value, with overweight allocations to other health and education contributing positively. The Fund’s bias towards revenue bonds was also a tailwind.
Municipal credit conditions remain resilient despite softening economic conditions, with state and local governments’ pension funding status improving due to improved pension funding discipline and strong stock market performance.
From a sector perspective, we favor revenues such as public power and water/sewer utilities, which offer stability due to their independent rate-setting ability, essentiality, and relatively predictable cash flows. We are generally underweighting sectors that offer less yield premium, such as state and local general obligation bonds.
Credit spreads have compressed significantly, lowering the yield compensation for adding risk. We continue to search for idiosyncratic opportunities among issues with attractive yields and improving fundamental credit outlooks.
With the winding down of federal aid stemming from COVID relief bills, municipal credits will need to demonstrate the ability to stand on their own. We continue to see good value in airport and toll road credits due to the recovery of air and vehicular travel, respectively, towards pre-pandemic levels.
On balance, we prefer to focus on large, geographically diversified issuers with strong balance sheets able to withstand temporary periods of economic weakness. We expect continued rate volatility near-term and are targeting neutral to modestly long duration postures versus respective benchmarks.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. To obtain a prospectus, or a summary prospectus, if available, that contains this and other information about a fund, contact your financial professional or visit the website. Read the prospectus carefully before investing. Past performance is no guarantee of future results.
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