US municipal bond quarterly market recap and outlook

Fourth quarter 2024 recap

The municipal bond market produced positive returns in the 2024 calendar year, overcoming some weakness in the fourth quarter. Bond yields rose during the quarter, as the Federal Reserve (Fed) signaled a slower pace of monetary policy easing, and investors focused on the uncertainty following the US election and its policy implications. Investment grade, high yield, and taxable municipal bonds returned -1.22%, -1.08%, and -3.57%, respectively, in the fourth quarter, but they generated positive returns of 1.05%, 6.32% and 1.57%, respectively, for the 2024 calendar year.¹ Investors generally favored lower credit quality bonds, which helped high yield municipal bonds outperform investment grade municipals and taxable municipals in both the fourth quarter and calendar year.

Key takeaways:

• Muni bonds generated positive returns in 2024, despite sharply rising yields in the fourth quarter. High yield munis had particularly strong returns for the year.
• New issuance, which came at a record-setting pace, was well absorbed by the market.
• Investment flows were positive for the year due to muni bond demand.
• Uncertainty increased after the November election, with muni investors focused primarily on the incoming Trump administration’s plans for tax policy.

Our outlook for 2025

We expect one to two fed funds rate cuts, as the Fed continues managing monetary policy consistent with its dual mandate of pursuing maximum sustainable employment and low, stable inflation.² For muni supply, we expect strong new issuance, comprised of $455 billion in tax-exempt munis and $45 billion in taxable munis.³ Also, if historical patterns hold, a unified Republican government may bolster muni performance.

Read the complete quarterly update.

Learn about our municipal bond funds.