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June 29, 2023

Ask the Experts: Municipal Bond Market Updates 2023

According to recent reports from leading financial experts, the municipal bond market has been a turbulent ride in 2023. Factors such as bank failures, rate volatility, uncertainty surrounding the Federal Reserve’s policies, and weakened investor demand have shaped the market’s performance.

Despite a strong start to the year, investors quickly encountered these challenges, adjusting to such things as the “higher for longer” policy of the Federal Reserve regarding the level of interest rates. Investors also had to adapt to an increasingly inverted municipal yield curve, resulting in a choppy and largely rangebound performance during the first half of the year.

Looking ahead to the second half of 2023, most experts anticipate a neutral performance. The typically robust summer redemption season is expected to give way to fall headwinds, primarily due to an anticipated increase in the calendar of new issuances and the lingering influence of a still-hawkish Federal Reserve. Moreover, bank demand, which has been affected by shrinking deposit bases and the disappearance of certain bank municipal securities portfolios, is expected to remain a challenging factor.

JP Morgan projects full-year tax-exempt issuance of $330 billion, along with $45 billion of taxable/corporate CUSIP issuance. Looking specifically at the second half of 2023, they anticipate tax-exempt issuance to reach approximately $178 billion, which would represent a 17% increase compared to the same period in 2022 ($152 billion). As for taxable supply in 2H23, JP Morgan expects supply to remain flat compared to 2H22, but significantly lower than the five-year average at $21 billion. June, July, and August typically emerge as the most supportive three-month period of the year as there tends to be more demand than new issue supply. On the other hand, the net supply forecasts for September and October stands at +$13 billion, indicating a jump in the amount of supply of new issuance in relation to potential demand. However, JP Morgan also emphasizes that while supply/demand technical indicators are significant, they can be easily influenced by mutual fund flows and other market dynamics.