Unsubscribe

Confirm you would like to unsubscribe from this list

You have unsaved changes on the page. Would you like to save them?

Remove strategy

Confirm you would like to remove this strategy from your list

Welcome to Thornburg

Please select your location and role to help personalize the site.
Please review our Terms & Conditions

For Institutional / Wholesale / Professional Clients

The content on this website is intended for institutional and professional investors in the United States only and is not suitable for individual investors or non-U.S. entities. Institutional and professional investors include pension funds, investment companies registered under the Investment Company Act of 1940, financial intermediaries, consultants, endowments and foundations, and investment advisors registered under the Investment Advisors Act of 1940.

TERMS AND CONDITIONS OF USE

Please read the information below. By accessing this web site of Thornburg Investment Management, Inc. ("Thornburg" or "we"), you acknowledge that you understand and accept the following terms and conditions of use.

Disclaimers

Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be licensed or available in all jurisdictions and there may be restrictions or limitations to whom this information may be made available. Unless otherwise indicated, no regulator or government authority has reviewed the information or the merits of the products and services referenced herein. Past performance is not a reliable indicator of future performance. Investments carry risks, including possible loss of principal.

Reference to a fund or security anywhere on this website is not a recommendation to buy, sell or hold that or any other security. The information is not a complete analysis of every material fact concerning any market, industry, or investment, nor is it intended to predict the performance of any investment or market.

All opinions and estimates included on this website constitute judgements of Thornburg as at the date of this website and are subject to change without notice.

All information and contents of this website are furnished "as is." Data has been obtained from sources considered reliable, but Thornburg makes no representation as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg disclaims, to the fullest extent of the law, any implied or express warranty of any kind, including without limitation the implied warranties of merchantability, fitness for a particular purpose and non-infringement.

If you live in a state that does not allow disclaimers of implied warranties, our disclaimer may not apply to you.

Although Thornburg intends the information contained in this website to be accurate and reliable, errors sometimes occur. Thornburg does not warrant that the information to be free of errors, that the functions contained in the site will be uninterrupted, that defects will be corrected or that the site and servers are free from viruses or other harmful components. You agree that you are responsible for the means you use to access this website and understand that your hardware, software, the Internet, your Internet service provider, and other third parties involved in connecting you to our website may not perform as intended or desired. We also disclaim responsibility for damages third parties may cause to you through the use of this website, whether intentional or unintentional. For example, you understand that hackers could breach our security procedures, and that we will not be responsible for any related damages.

Thornburg Investment Management, Inc. is regulated by the U.S. Securities and Exchange under U.S. laws which may differ materially from laws in other jurisdictions.

Online Privacy and Cookie Policy

Please review our Online Privacy and Cookie Policy, which is hereby incorporated by reference as part of these terms and conditions.

Third Party Content

Certain website's content has been obtained from sources that Thornburg believes to be reliable as of the date presented but Thornburg cannot guarantee the accuracy, timeliness, completeness, or suitability for use of such content. The content does not take into account individual investor's circumstances, objectives or needs. The content is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services, nor does it constitute investment advice and should not be used as the basis for any investment decision.

Suitability

No determination has been made regarding the suitability of any securities, financial instruments or strategies for any investor. The website's content is provided on the basis and subject to the explanations, caveats and warnings set out in this notice and elsewhere herein. The website's content does not purport to provide any legal, tax or accounting advice. Any discussion of risk management is intended to describe Thornburg's efforts to monitor and manage risk but does not imply low risk.

Limited License and Restrictions on Use

Except as otherwise stated in these terms of use or as expressly authorized by Thornburg in writing, you may not:

  • Modify, copy, distribute, transmit, post, display, perform, reproduce, publish, broadcast, license, create derivative works from, transfer, sell, or exploit any reports, data, information, content, software, RSS and podcast feeds, products, services, or other materials (collectively, "Materials") on, generated by or obtained from this website, whether through links or otherwise;
  • Redeliver any page, text, image or Materials on this website using "framing" or other technology;
  • Engage in any conduct that could damage, disable, or overburden (i) this website, (ii) any Materials or services provided through this website, or (iii) any systems, networks, servers, or accounts related to this website, including without limitation, using devices or software that provide repeated automated access to this website, other than those made generally available by Thornburg;
  • Probe, scan, or test the vulnerability of any Materials, services, systems, networks, servers, or accounts related to this website or attempt to gain unauthorized access to Materials, services, systems, networks, servers, or accounts connected or associated with this website through hacking, password or data mining, or any other means of circumventing any access-limiting, user authentication or security device of any Materials, services, systems, networks, servers, or accounts related to this website; or
  • Modify, copy, obscure, remove or display the Thornburg name, logo, trademarks, notices or images without Thornburg's express written permission. To obtain such permission, you may e-mail us at info@thornburg.com.

Severability, Governing Law

Failure by Thornburg to enforce any provision(s) of these terms and conditions shall not be construed as a waiver of any provision or right. This website is controlled and operated by Thornburg from its offices in Santa Fe, New Mexico. The laws of the State of New Mexico govern these terms and conditions. If you take legal action relating to these terms and conditions, you agree to file such action only in state or federal court in New Mexico and you consent and submit to the personal jurisdiction of those courts for the purposes of litigating any such action.

Termination

You acknowledge and agree that Thornburg may restrict, suspend or terminate these terms and conditions or your access to, and use, of the all or any part this website, including any links to third-party sites, at any time, with or without cause, including but not limited to any breach of these terms and conditions, in Thornburg's absolute discretion and without prior notice or liability.

Decline
Give Us a Call

Fund Operations
800.847.0200

FIND ANOTHER CONTACT
2024 Outlook for Municipal Bonds
Municipal Bonds

2024 Outlook – Muni Bonds: Will the Tether to Treasuries Unravel?

In 2023, Munis and Treasuries moved in lockstep, and flow dynamics roiled the market. Investors need to be mindful of technical factors amid bountiful yields.

Higher for Longer: Another Tough Year for Bonds

After a challenging 2022, the municipal bond market showed relative stability in the first half of 2023, with outflows slowing down considerably and liquidity recovering to healthier levels. But Muni market sentiment turned volatile in the latter half of the year, triggered by the U.S. Federal Reserve’s decision to hike the Fed Funds rate by 25 basis points in July and maintain a steady policy in September.

Municipal Bond Monthly Performance Was Negative until November, Like 2022

Source: Bloomberg, ICE BoA

There were signs that the U.S. Federal Reserve might be approaching the end of its rate hike cycle in September while indicating its commitment to keep rates higher for longer to continue combating inflation. In response, the market sent Treasury yields surging, and bond prices fell across the board in September, as seen above. Muni bonds joined the rout, with yields soaring on top-rated Muni credits and bond prices diving. But Muni bond performance took off in November as tax-loss selling abated and investors sought to lock in higher yields should Fed policy remain steady or even ease in reaction to a widely anticipated, if much delayed, recession. As a result, 2023 is looking to wrap up as a flat to strong year for Munis, bucking the trend in broader fixed income markets.

Munis Performance Remains Vulnerable to Technical Drivers

Historically, households (i.e., individual investors) owned nearly half of the outstanding debt, and these investors would hold bonds until maturity while consistently reinvesting the coupon and principal amounts. This investor behavior coupled with bond issuers making coupon payments in January and July created seasonal demand for bonds. However, household ownership has declined, as seen below, while managed funds, including Exchange Traded Funds (ETFs), now absorb a larger share of outstanding Munis. ETF assets have tripled since 2019.

Household Ownership of Muni Bonds Is in Decline, Leading To Volatility

Source: Federal Reserve Chart of Accounts

While investors have appreciated the daily trading frequency of mutual funds and ETFs’ intraday action, ETFs can amplify market movements given their enhanced liquidity features and ability to trade at a significant discount or premium to their underlying assets. The latter is especially true during times of stress, as was seen during the September panics of 2022 and 2023 when retail investors ramped up selling pressure or redemptions. That, in turn, forced mutual funds and ETFs to sell, exacerbating an already volatile situation and triggering steep declines in bond prices.

Heading into 2024, we believe fund flow dynamics of mutual funds and ETFs will remain among the key drivers of short-term Muni market volatility and performance. On the bright side, the heightened volatility presents unique opportunities for active managers to recognize market overreactions and capitalize on market selloffs. When bond prices fall indiscriminately across the board due to technical, momentum-driven factors, this creates the perfect opportunity for active managers to secure fundamentally sound municipal credits at discounted prices and bountiful yields.

Looking Forward to 2024

We believe current market sentiment is too dependent on the latest economic indicators as investors attempt to predict the Fed’s next move. For instance, the recent drop in inflation figures led many to believe the central bank would pause rate hikes, with some even discussing a potential Fed pivot to rate cuts — and that sentiment pushed yields lower. We think these sorts of short-term repricings have not only been historically misguided, leading to being inaccurate, but can also be distracting and counterproductive to providing long-term value for bond investors.

Moreover, bond and equity investors are becoming hypersensitive to daily economic headline news in the current environment, and collective efforts to “read the tea leaves” have adversely impacted the relationship between U.S. Treasuries and Munis. In the past, municipal price movements tended to follow similar patterns to those of Treasuries, with Munis generally lagging Treasuries by a few weeks. But Munis have become so tightly tethered to what is happening in Treasuries that these asset classes now move in lockstep, nearly daily, with minimal differentiation between stronger and weaker credits.

Bountiful Yields in High-Quality Credits

Bond yields have risen to levels not seen in decades, and investors shouldn’t miss the opportunity to lock in here and take advantage of the heightened levels of income. Opportunities in Munis are even more compelling when investors consider the tax-exempt benefit, especially in high-tax states.

As seen below, AAA-A rated municipal credits offer much higher yields than similar-quality corporate bonds and government-backed Treasuries across five-, 10- and 30-year periods. It is also worth noting that, over a decade, the tax-adjusted returns of A-rated municipal bonds currently rival those of equities. Essentially, Munis could potentially provide equity-like returns with lower risk than stocks.

Getting Paid Well to Own High-Quality Muni Credits

Source: Bloomberg BVAL Yield Curves

Stability and Protection in Municipal Bonds

Municipal bonds are often considered a relatively stable and protective asset class because they tend to be less susceptible to economic headwinds, as most of them are backed by the financial strength of the state or local taxing authorities or specific income streams from various projects. That makes it critical to comprehensively understand the fiscal health and debt profiles of the local government entities issuing Munis.

Contrary to popular belief and unlike the federal deficit challenges, municipalities exhibit remarkably low levels of debt in comparison with other sectors of the economy, underscoring the strength of this sector’s financial health. We think Munis are uniquely positioned to be a cornerstone of investors’ portfolios due to their strong sector fundamentals, resilience, and long-term stability.

State and Local Governments Carry Less Debt

Source: Federal Reserve Chart of Accounts

Outlook and Positioning

The recent resilience of the U.S. economy surprised many investors who came into 2023 expecting a recession. That strength has led many to reassess and price out near-term recession risks. While there is ample debate about the possibility of a soft landing or whether the current environment is the calm before the storm, we remain attuned to the ever-evolving macro environment while maintaining an unwavering focus on bottom-up credit fundamentals to drive portfolio outcomes.

Turning to 2024, Munis are an enticing investment option given this asset class’s attractive tax-equivalent yields and protection. In particular, we believe specific municipal sectors are positioned to perform better than others based on our outlook for each, as summarized below.

Outlook

Yields

The post-Global Financial Crisis high in Municipal yields reached at the end of October may prove to be a cycle high. The Federal Reserve’s shift away from a hiking regime seems likely, however, we do not believe that will usher in an immediate easing cycle. It has paid to take the Fed at its word for the last several years and we see no reason that will change in 2024.

Credit/Sector

The credit quality of municipal borrowers has been very strong over the last several years but is likely to decline even without a recession. Data points suggest the economy is slowing and will lead to lower tax revenue collections, put pressure on budgets, and lead municipalities to draw down the reserve funds built over the last decade.

Defaults

Municipal defaults have remained low in historical context but there has been a rise from year-to-year. The increase has been focused in areas that were challenged prior to the pandemic but whose problems were exacerbated by it. We expect this trend to continue where economically sensitive areas of the market will face challenges. That’s not to say we are ringing the alarm. We do not expect a rash of defaults, but credit research is paramount going forward.

Positioning

Yields

The higher absolute level in yields created, combined with a slowing in Fed rate hikes created an environment where extending duration is additive to portfolios. The benefit is two-fold: the immediate increase in income generation for portfolios and the potential upside in bond prices should rate cuts occur in the first half of 2024.

Credit/Sector

Credit spreads widened in conjunction with yields moving higher in 2023. This created the opportunity to be compensated for taking risk, but investments were made judiciously. We favored the lower-end of the investment-grade space while avoiding the Pavlovian response of buying high yield municipal bonds after a sell-off because of where we are in the credit cycle.

Defaults

Our natural predilection is to a high-quality bias in our strategies because we believe the historic low default rates in the investment-grade space aligns with the goals of municipal investors. We have ramped up on our credit surveillance efforts to mitigate defaults and jettisoned credits that may face undue challenges in the future. We have also avoided project finance deals funded with the rosiest of projections during the economic expansion that are struggling to meet construction or revenue goals.

Discover more about:

Stay Connected

Subscribe now to stay up-to-date with Thornburg’s news and insights.
Subscribe

More Insights

Woman sits at her desk analyzing financial forecasts
Markets & Economy

Market Concentration and the Fed’s Policy Outlook

Explore the recent trends in market concentration and examine the implications of the Federal Reserve's policy decisions for the rest of 2024.
Two men stand in a desert holding a rope pulling against each other
Markets & Economy

Value vs. Growth: Does Another Fed Hike Matter?

Discover why value and income-oriented stocks are set to outperform in today's market dominated by rising interest rates and persistent inflation.
Woman calculates some financial decisions over her desk.
Markets & Economy

The Value of Dividends and Munis to Stoke Income

Explore the impact of high dividend stocks and municipal bonds in a rising rate environment amid increasing government debt and new administrative policies.
A few people using a map and a compass to pinpoint their current location and future destination.
Economy

Navigating Recession, the Fed, Inflation and Borrowing

Examine the current economic complexities while considering consumer demand, corporate resilience, and interest rates to anticipate market risks in 2024.
Young man checks his airline status against his mobile ticket.
Monetary & Fiscal Policy

Recession and Reversion to the Mean

Exploring the economic landscape reveals persistent recession signals and elusive downturns shaping the outlook. Read about the interplay of factors now.
Webcasts image, fixed income portfolios as the fed ponders a pivot.
Fixed Income

How to Position Bond Portfolios as the Fed Ponders a Pivot

The Fed's changing interest rate policy adds uncertainty to the bond market, highlighting the need for resilient portfolios amid inflation and economic changes.

Our insights. Your inbox.

Sign up to receive timely market commentary and perspectives from our financial experts delivered to your inbox weekly.