Strong performance during the fourth quarter of 2022 helped municipals mitigate some of the performance damage that occurred during a tumultuous year. Nevertheless, the muni market generated its worst calendar year total return performance since 1981. With the bulk of the Fed’s rate hikes in the rearview mirror, Loomis Sayles’ Municipal Bond Team explains why they see greater income potential among munis and areas of improvement.
  • Relative outperformance: Municipals fared relatively better than other high quality, fixed income alternatives in 2022, outperforming both Treasurys and corporate bonds.
  • Yield is back: Municipal index yields rose by more than 240 basis points during 2022. While it was painful for bondholders to endure, the rate rise leaves the market with greater income producing potential and downside protection potential at current valuations.
  • Late cycle observations: The municipal market appears to be in a stronger position than it has been in previous late cycle periods. Credit fundamentals appear sound across most sectors, nominal yields have been higher, and liquidity conditions appear stable.
  • Airports sector: Moderately improving US domestic leisure travel has climbed to above pre-pandemic levels, yet room remains for continued recovery of business and international travel. The team’s overall forecast for the sector is “moderately improving.”