In accordance with investment manager Lord Abbett, the municipal bond market outlook appears positive midway through 2023, driven by aspects comparable to the anticipated cessation of rate of interest hikes by the U.S. Federal Reserve, moderating inflation, and an improving supply-demand dynamic. These developments are expected to make municipal bonds more attractive to investors in search of tax-free income, notwithstanding persistent uncertainties related to inflation and potential market crises.

The Federal Reserve’s projected pause in rate hikes, coupled with signals of decelerating economic growth and easing inflation, may bode well for municipal bond market performance and fund flows. Higher yields on municipal issues offer investors a probability to secure appealing return prospects, providing a buffer for total returns that might be helpful within the face of potential economic downturns.

Recovery in demand and an uptick in mutual fund inflows are predicted as rate volatility diminishes. Despite recent trends of negative mutual fund flows, the decrease rate is slower than the previous 12 months. Supply has been somewhat limited thus far this 12 months, attributed to issuers postponing market entry as a consequence of elevated rates of interest and substantial reserves. Nonetheless, a catch-up in supply is anticipated within the second half of the 12 months.

Concerns regarding potential oversupply from regional bank failures and subsequent muni holdings sales are usually not foreseen to pose a major problem. The assertion is that the market can adequately absorb these portfolios. Even when the failed banks’ total municipal holdings were incorporated into this 12 months’s supply, it will remain substantially lower than the whole municipal issuance of the previous 12 months. This example’s potential impact on the broader market performance is prone to be limited as a consequence of the distinctive low coupon structure of the banks’ holdings.

Municipal Bond Strategy Scorecard

Overall, shorter duration and better credit quality-based strategies outperformed several high-yield and tactical muni strategies within the trailing one month.

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Duration Strategies

Shorter duration muni strategies proceed to perform higher than intermmediate duration based strategies over the trailing one month.

Winning

• PIMCO Short Term Municipal Bond Energetic ETF (SMMU) , up 0.32%
• Allspring Ultra Short Term Municipal Income R6 (WUSRX) , up 0.11%
• SEI Short Duration Municipal Fund F (SUMAX) , up 0.11%

Losing

• Thornburg Intermediate Municipal Fund C (THMCX) , down -1.26%
• BlackRock Short-Term Municipal Fund Investor C (MFLMX) , down -1.22%
• Baird Core Intermediate Municipal Bond Institutional (BMNIX) , down -1.14%
   

Credit Quality Strategies

Conservative high-quality muni credit strategies proceed to outperform high-yielding strategies over the trailing month.

Winning

• Fidelity Flex Conservative Municipal Income Fund (FUEMX) , up 8.02%
• Baird Municipal Bond Fund Institutional (BMQIX) , up 0.12%
• PGIM Short Duration Muni Fund R6 (PDSQX) , flat 0%

Losing

• Nuveen California High Yield Municipal Bond Fund I (NCHRX) , down -1.49%
• AB High Income Municipal Portfolio Advisor (ABTYX) , down -1.46%
• PIMCO Municipal Bond Fund I-3 (PMUNX) , down -1.45% 

Area of interest Strategies

Amongst area of interest strategies, strategies focused on diversifying risk, especially those involving each muni and equity securities, performed higher than some tactical pure-play muni strategies.

Winning

• Federated Hermes Muni & Stock Advantage Fund F (FMUFX) , up 0.53%
• Columbia Strategic Municipal Income Fund Adv (CATRX) , up 0.1%
• Sierra Tactical Municipal Fund Institutional (STMEX) , down -0.31%

Losing

• Aspiriant Risk-Managed Municipal Bond Fund (RMMBX) , down -1.36%
• Pioneer AMT-Free Municipal Fund A (PBMFX) , down -1.3%
• Counterpoint Tactical Municipal Fund C (TMNCX) , down -1.25% 

State Focus Strategies

Several California focused muni strategies emerged as winners within the trailing one month, while a handful of Kansas focused muni strategies struggled.

Winning

• IQ MacKay California Municipal Intermediate ETF (MMCA) , up 0.36%
• PIMCO Recent York Municipal Bond Fund I-3 (PNYNX) , up 0.08%
• Eaton Vance California Municipal Opportunities Fund A (EACAX) , up 0.07%

Losing

• PIMCO Recent York Municipal Bond Fund C (PBFCX) , down -1.57%
• MFS California Municipal Bond Fund A (MCFTX) , down -1.44%
• Viking Kansas Municipal Fund A (KSMUX) , down -1.32%*

Methodology

Every month, we offer a snapshot of the performance of key muni bond focused mutual funds and ETFs to spotlight the trending investment strategies across different segments of the broader muni market. We scan through a whole bunch of relevant muni bond focused mutual funds and ETFs. Fund performance data is calculated for the trailing one month, based on change in NAV.

Here’s a summary of various muni bond strategies covered in this text:

• State focus strategies typically give attention to muni bonds issued inside specific states like Recent York or California. They may also include muni national bonds, which may be issued by multiple states and native governments to fund public projects.
• Credit quality strategies give attention to muni bonds either carrying a particular credit standing or a spread of credit rankings from investment-grade to below-investment-grade, as determined by credit standing agencies like S&P, Moody’s and Fitch, amongst others.
• Duration strategies give attention to muni bonds, which may be assessed based on rate of interest risk. Duration is often measured in years. As a general rule of thumb, higher the duration (aka the more you may have to attend to get your coupons and principal), the more will likely be the drop within the bond’s price as rate of interest rises. This strategy can cover a big selection of muni bonds, based on short to very long time to maturity.
• Area of interest strategies give attention to any strategy that are usually not covered within the previous 3 categories. Some popular muni stratgies include ESG, AMT-free, risk-managed and other tactical themes meant to capture unique opportunities.