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Muni Bond Fortunes Could Improve

Elizabeth Foos

Beth Foos: Still feeling the impact of the issuance spike in late 2017, muni bond issuance has remained relatively light year over year. That said, October's new issuance calendar came in stronger than in previous months.

At the same time, outflows from muni funds that started in September continued into October and November and put pressure on performance.

Rising interest rates also contributed to the muni market's negative returns in the past several weeks. As investors sought insulation from those rising rates, short-term and floating-rate muni bonds became more popular, and the demand for long munis lagged. Recent tax reform also played a part here, because it disincentivized banks and insurance companies from using longer munis for tax shelter. 

Across the sectors, lower quality bonds kept up their outperformance throughout the third quarter, but that trend has shifted. More recently, certain high-yield munis and long-maturity bonds have fared worse than their shorter and higher quality counterparts.

There's reason to look for a solid ending to the year for the muni market though. Historically, late November and December have been stronger months for munis because issuance lightens up and investors still hunt for yield. And while munis have generally underperformed in 2018, the fundamental credit quality of many issuers has improved.

A strong U.S. economy has boosted the tax revenues of many state and local governments year to date, and that should ease some budget pressure moving forward.