Municipal Bond Outlook: Yield Curve Inversion Persists

The Loomis Sayles Municipal Bond Team weighs in on midyear muni market conditions.
  • Rate markets retrenched approaching midyear, leading municipals to give back some of the gains from the start of 2023. Nonetheless, total returns remained in positive territory at the mid-year point.
  • Yield curve inversion remained a consistent feature through the first half of 2023, thanks to more aggressive Fed hiking than previously expected. While unprecedented, the Loomis team sees the situation as understandable given the near record inversion of the Treasury curve, and furthermore highlights the importance of yield curve exposure and its impact on investor risk/return expectations.
  • Yield curve inversion remained a consistent feature through the first half of 2023, thanks to more aggressive Fed hiking than previously expected. While unprecedented, the Loomis team sees the situation as understandable given the near record inversion of the Treasury curve, and furthermore highlights the importance of yield curve exposure and its impact on investor risk/return expectations.
  • Municipal investors picked up nearly 100 basis points of additional yield at the long end of the curve (10 to 30 years), whereas the 8 to 10 year portion of the curve offers the lowest yield in the current environment.
  • Reinvestment flows were strong at midyear due to seasonal factors in the summer months thanks to bonds maturing and coupon payments made. This seasonality typically results in increased demand with investors searching for opportunities to reinvest cash flows. Along with strong flows, the muni market is seeing issuance volume down 16% vs. 2022.
  • In their quarterly sector profile, the team currently sees the hospital sector with weak cash flow margins and thin operating profitability. While labor expenses seem stabilized, providers are likely operating with a much higher expense base, without commensurate revenue growth, and limited expected federal aid.
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The views and opinions expressed may change based on market and other conditions. Municipal markets may be volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities.

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