Municipal bond market recap and outlook

Municipal bonds likely to continue strong performance in 2018 amid demand from non-US investors

Feb 20, 2018 | Mark Paris and Stephanie Larosiliere

Although shifting expectations about potential tax reform unsettled investors during the fourth quarter, municipal bonds enjoyed another year of positive performance in 2017, with the investment grade municipal market return 5.45% and the high yield municipal market returning 9.69%.

The shape of the municipal curve flattened during 2017, as yields on short-term municipal bonds rose and those on municipal bonds longer than four years fell. Consequently, intermediate and long maturity bonds outperformed short maturity bonds for the year. Municipal bonds outperformed US Treasury securities. Short-term Treasury yields rose more than short-term municipal yields as the Federal Reserve hiked interest rates three times - in March, June and December 2017.

We expect to see continued appetite for municipal bonds as we believe the asset class remains attractive relative to other segments of the fixed income market, particularly in tax-adjusted terms. In our view, positive flows are likely to continue throughout 2018. We expect demand from non-US investors to continue to grow given that interest rates in most countries are expected to remain lower for longer.

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