
US municipal bond quarterly market recap and outlook
Get an update from the Invesco Municipal Bond team on the muni bond market and their outlook on what may be ahead.
Muni bonds produced solid gains in September, but heavy supply in October, however, could put pressure on prices, increasing the attractiveness of their yields.
The federal government shutdown fuels headlines, but it’s not expected to have a lasting impact on investment performance.
Average state pension liabilities declined in 2024, improving their long-term financial leverage and fixed cost metrics.
Here’s our insight and perspective on what’s happening in the muni market, including supply and demand, credit trends, and a quick look at key muni data points.
Tim: Muni bonds generated some impressive gains in September. Were you expecting this kind of performance?
Mark: I expected to see the market advance, given that September is historically a positive month for munis, but I didn’t foresee the strength of the gains. Muni bonds turned in their strongest monthly performance since December 2023 and their best September performance since 2009.1 Although I remain optimistic about muni performance for the fourth quarter overall, I think we may see some pressure for the rest of October. It has historically been the last heavy supply month of the calendar year. Over the past five years or so, October new issuance has averaged between $50 and $55 billion.2 There’s a silver lining, however. Price weakness may provide investors with an opportunity to put more money to work in the Muni market at attractive yields.
Tim: We’re currently in another government shutdown, which is the fifth in the last 25 years.3 Large parts of the federal government stopped operating on October 1, after Congress failed to pass legislation to keep it funded. Should investors be worried?
Mark: I don’t think they should be especially concerned. As you pointed out, this isn’t the first government shutdown, and I think it’s unlikely to be the last. Eventually, a spending bill will be passed by Congress, and the government will reopen, with minimal impact on the country and on investors’ portfolios.3 Of course, a shutdown and the media noise around it can be unnerving, but it shouldn’t be a reason for investors to change their long-term investment plans. Adhering to a long-term plan is one of the most effective ways to manage one’s investments, in my opinion. The Invesco Municipal Bond team doesn’t react to short-term events either. We continue to focus on our time-tested process, taking a long-term view. In my experience, it’s the best way to provide value for investors.
Tim: We’ve talked a lot about the fundamental health of state credits. We saw more good news on that front when Moody’s put out a report highlighting states’ improved ability to service their long-term pension liabilities.
Mark: Yes, and as a result, their financial picture looks brighter. The risk of pension investment losses causing major budget shocks has been a moderate concern, historically. That risk has lowered lately, as pension and other post-employment benefit liabilities have declined and revenue has grown moderately.4 The average pension contributions’ share of revenue has lowered to a median of 5.0%.4 Pension contributions also remained strong in fiscal 2024, as more than two-thirds of states contributed above necessary levels, up from half in fiscal 2021.4 I'm cautiously optimistic that states will continue to practice fiscal responsibility with regards to their pension liabilities.
Read the complete article, including munis by the numbers.
Get an update from the Invesco Municipal Bond team on the muni bond market and their outlook on what may be ahead.
The Invesco Municipal Bond team provides an overview of credit fundamentals in California, New Jersey, New York, Pennsylvania and the impact on municipal bond shareholders in each state.
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Important information
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Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/or interest.
Junk bonds involve greater risk of default or price changes due to changes in the issuer’s credit quality.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.
The values of junk bonds fluctuate more than those of high-quality bonds and can decline significantly over short time periods.
All fixed income securities are subject to two types of risk: credit risk and interest rate risk. Credit risk refers to the possibility that the issuer of a security will be unable to make interest payments and/ or repay the principal on its debt. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
Municipal bonds are issued by state and local government agencies to finance public projects and services. They typically pay interest that is a tax in their state of issuance. Because of their tax benefits, municipal bonds usually offer lower pre-tax yields than similar taxable bonds.
All data provided by Invesco unless otherwise noted.
The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer under US federal tax laws. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Past performance does not guarantee future results. An investment cannot be made into an index.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
There is no guarantee the outlooks mentioned will come to pass.
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