The Muni Market: What’s in Store for 2024?

Market volatility is likely to continue until the Federal Reserve’s (Fed) first cut to the Fed Funds rate. The futures market currently says we may not have to wait that long with the first cut fully priced in before mid-year 2024. However, the futures market has been too quick to price in lower rates ever since the Fed started hiking rates in 2022. While we don’t believe a significant recession or economic downturn is a prerequisite for lower rates, the Fed will likely be more focused on getting inflation back to its 2% target. All this means volatility is likely with us for the foreseeable future.

So, what does this mean for the municipal bond market? There are several dynamics in the market that we think will play prominently in 2024. Now that we are unlikely to see further Federal Reserve rate hikes, investors may start to consider moving out of cash, especially when they can potentially lock in higher after-tax yields with tax-exempt bonds. Although credit spreads aren’t necessarily wide from a historical standpoint, high yield may still be the place to be in 2024 given the extra yield and potential upside from a return of positive fund flows. Another area we think will be key in 2024 is curve placement as the Fed shifts from hiking to cutting rates.

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