Municipal Bonds Positioned to Shine in 2023
January 24, 2023
Read Time 2 MIN
On a recent webinar, Michael Cohick, Director of Product Management, and Tamara Lowin, Senior Municipal Credit Analyst, shared their outlook for municipal bonds in 2023. Highlights from their discussion are below.
Darkest Before the Dawn: A Bright Outlook for Municipal Bonds
Along with other fixed income asset classes, 2022 was a rough year for municipal bonds. However, yields are now higher for muni bonds than at any other time in the past 15 years. And dating back to 1989, a down year in the municipal bond market has been followed by at least one year (or several) of positive returns.
Strong Recovery Historically Followed Down Years for Investment Grade Municipal Bonds
Source: ICE Data Services. As of 12/31/22. Based on the ICE US Broad Municipal Index, which tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. You cannot invest directly in an index. Past performance is not a guarantee of future results.
Muni Bond Default Rates Low and UnLikely to Substantially Increase in 2023
Low default rates are a hallmark of the municipal bond asset class. This was reaffirmed in Moody’s Investors Service’s annual municipal bond market snapshot, U.S. municipal bond defaults, and recoveries, 1970-2021, with updates through 2021. In more good news for muni investors, the report noted that the sector continued to recover from the effects of COVID-19. State tax revenue has recovered and is now higher than its pre-pandemic trajectory.
In addition, while they may have become more common over the past 15 years, municipal defaults and bankruptcies remain rare overall. In fact, there were no new rated municipal bond defaults during the period of significant market stress in 2021 resulting from COVID.
Municipal Bond Defaults Remain Muted
Source: Municipal Market Analytics, as of 12/31/22. Past performance is not a guarantee of future results.
Favorable Supply/Demand Backdrop
In 2022 we saw massive outflows from the muni space and severely muted supply. However, in the current environment, demand for tax-exempt income is expected to outpace the supply of new municipal issuance. This supply constraint may increase the likelihood of solid performance in 2023.
Looking ahead, we believe the long-term prospects of municipal bonds remain compelling. The eventual return of municipal market performance is likely indisputable; the only question is when. While we await dawn, the favorable market backdrop keeps us warm.
Learn more about VanEck’s suite of municipal bond ETFs, which offer investors the ability to exercise control over portfolio yield, duration, and credit exposure at different points in the interest rate cycle.
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IMPORTANT DISCLOSURES
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this email.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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IMPORTANT DISCLOSURES
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this email.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.