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
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.
Investing involves risk, including possible loss of principal.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.
There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.
A portion of the income may be taxable.
Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
The opinions expressed are as of January 17, 2023, and may change as subsequent conditions vary.
The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
Prepared by BlackRock Investments, LLC, member FINRA.
BlackRock provides compensation in connection with obtaining or using third-party ratings and rankings
Not FDIC Insured | May Lose Value | No Bank Guarantee
©2024 BlackRock, Inc. or its affiliates. All Rights Reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, FACTORSELECT, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, the iShares Core Graphic, CoRI and the CoRI logo are trademarks of BlackRock, Inc. or its affiliates. All other trademarks are those of their respective owners.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
© BlackRock
Read more commentaries by BlackRock
