Muni Outlook: Back in Vogue

For the first time in a long time, muni investors may be able to earn attractive yields without having to take undue risk.

Like high-waisted bellbottoms and baggy overallsfashions that were once out but are making a resurgence—2023 should be the year that municipal bonds come back in vogue, too. Although 2022 so far has been a brutal year for the muni market, we expect things to change in 2023. For the first time in a long time, investors can earn appealing income on their muni bond portfolio, which should begin to attract investors back and bode well for total returns.

Recovering from a tough year

So far, 2022 has been characterized by the Federal Reserve aggressively tightening monetary policy in an effort to quell decades-high inflation. Fed policymakers hiked short-term rates six times. However, the worst is likely behind us, as the Fed has indicated it will slow the pace of rate hikes and may be done in early 2023.

For the first time in a long time, yields are attractive. At the beginning of the year, the yield on the Bloomberg Municipal Bond Index was close to 1%, near the lowest level in the history of the index. That's no longer the case. The yield on the index has risen to roughly 3.4%. While this isn't as high as other fixed income options, municipal bonds are one of the few investment options that are often exempt from federal and potentially state income taxes if the issuer is located in your home state, so after adjusting for this, they are attractive relative to alternatives.

Muni yields are near the highest level in over a decade

Chart shows the yield to worst on the Bloomberg Municipal Bond Index which has risen to 3.4%. That is near the high going back to late 2011.

Source: Bloomberg Municipal Bond Index, weekly data as of 12/8/2022.

Past performance is no guarantee of future results.

To put that into dollars and cents, at the beginning of 2021, an investor would have needed a muni portfolio of nearly $900,000 to generate $10,000 of interest income. Today, an investor would need a portfolio of roughly $290,000 to generate the same $10,000 of interest income—which, again, may be exempt from federal income taxes.