• The municipal market finished an up and down year on a positive note, recording the strongest quarterly performance for the asset class since 1986, according to Bloomberg.
  • Key factors currently driving the municipal market include interest rates, the U.S. economy, new bond issuance, relative valuations and yields, credit quality, among others.
  • Municipal bonds are vital to financing the infrastructure of local communities and states, and offer a number of potential benefits, including tax-exempt income.
  • Aquila’s single-state municipal bond funds employ a locally-based approach to tax-exempt investing, providing an up-close perspective on the issuers and economy in each state.
  • The financial markets have a way of reminding us that it isn’t always smooth sailing. As history has demonstrated, investments can be influenced to varying degrees by changing market conditions. That’s why charting a course for your financial future, and being prepared for inevitable twists and turns, may be important to help one navigate times of volatility and uncertainty.

    While the municipal bond market showed some signs of improvement in 2023 following particularly challenging periods during the prior two years, some investors remain leery, wondering what lies ahead. What course of action will the Federal Reserve (the “Fed”) take during 2024? How might this impact the direction of interest rates? Will inflation continue, or could the economy be headed for a recession? These and other market drivers remain to be seen, which is why we believe it’s important to maintain perspective, as well as a long-term focus.

    As we proceed into 2024, following is a summary of highlights from the past year, as well as some important considerations for the year ahead.

    A Strong Finish in 2023

    The municipal bond market experienced some ups and downs during 2023. There was lingering weakness as the year drew to a close, particularly during the month of October. However, municipal bonds staged a sharp turnaround in November and December to finish the year on a positive note. The 10-year AAA yield (as measured by Bloomberg), which began 2023 at 2.45%, rose to a high of 3.65% in October and eventually settled lower to end the year at 2.26%. This helped deliver strong total returns for municipals in Q4 — the strongest quarterly performance for the asset class since 1986, according to Bloomberg. During the fourth quarter, the Bloomberg® Municipal Bond: Quality Intermediate Index recorded a return of 5.86%, enabling it to muster an overall return of 4.64% in 2023.

    On a relative basis, the municipal bond market outpaced U.S. Treasury bonds by a wide margin, as the yield on the 10-year U.S. Treasury bond declined 70 basis points. This outperformance was largely mirrored across the entire yield curve (1–30 years), reducing the ratio of municipal bond yields to U.S. Treasury bond yields. During the fourth quarter of 2023, the 10-year Municipal-to-Treasury ratio declined from 74% to 58%, while the 30-year ratio declined from 93% to 83%. Although this outperformance diminished some of the “cheapness” that surfaced in municipal values last fall, municipal bonds — particularly when considered on a taxable-equivalent basis — remained attractive relative at year-end. This puts municipal bonds in what appears to be a position to offer attractive risk-adjusted return prospects on a relative basis, including areas of the taxable, investment-grade fixed income markets.

    What’s Currently Driving Municipal Bonds

    The Federal Reserve continues to exert its influence on the financial markets, including municipal bonds. In an attempt to manage economic growth, inflation, and at the same time, avoid triggering a possible recession, the Fed has been focused on controlling the level of interest rates. The Fed’s “tight” monetary policy, which began in March of 2022 with a series of increases in the federal funds rate (the interest rate that banks charge each other to borrow or lend excess reserves overnight), seems to have entered into more of a holding pattern for the time being. Following a period that included 11 consecutive rate hikes, the Fed has elected to push pause, leaving the federal funds rate unchanged at each of the last four Federal Open Market Committee meetings (through January, 2024). Although the Federal Reserve previously suggested it would consider adopting more of an “easing” monetary policy and possibly begin lowering interest rates in 2024, Fed Chair Jerome Powell has now said that future decisions will be made on a meeting-by-meeting basis, and will be heavily dependent on key economic data.

    Like other fixed income asset classes, municipal bonds are historically sensitive to certain factors that influence the economy, financial markets, and specific issuers and industry sectors. One such indicator is the level of inflation, which has had a major influence on the U.S. economy, including higher costs for consumers, as well as tighter profit margins for many businesses. It appears that, after recently reaching decades-high levels, inflation has settled lower and is more in line with where the Federal Reserve would prefer to see it. Inflation, as measured by the Consumer Price Index (“CPI”), rose as high as 9.1% in June of 2022. After beginning 2023 with a year-over-year increase of 6.4% in January, the CPI steadily worked its way lower, ultimately closing the year at a rate of 3.4% in December. Going forward, the Fed has indicated its intention to further reduce the inflation rate to a target range of 2.0%.

    The issuance of new municipal bonds at both a national and state level is also an important factor in terms of supply/demand dynamics. While issuance was somewhat lackluster during 2023, it finished the year on a particularly strong note, which many view as a positive sign for the municipal market. In the fourth quarter of 2022, new issuance nationally totaled $105.5 billion — a 39% increase over the $75.5 billion issued in Q4 2022. Overall in 2023, new municipal bond issuance totaled $379.9 billion, which represented a modest decline from the $391.3 billion issued in 2022, according to data from The Bond Buyer.

    Regarding credit quality, municipalities around the country demonstrated resilience in the face of recession concerns; also, in the wake of the credit rating downgrade of U.S. government debt by Fitch Ratings (from AAA to AA+) that occurred in August 2023. An indicator of this was the credit rating upgrade of New York’s Metropolitan Transportation Authority (“MTA”) — one of the most economically-sensitive municipal bond issuers in the national municipal bond — by S&P Global Ratings (from BBB+ to A-) in October. This reflects how the essential nature of municipal services (in this case, mass transit in the nation’s largest city) is important to credit quality.

    Looking Ahead

    At Aquila Group of Funds, we remain optimistic in the long term for the municipal bond market. Municipal bonds are vital to financing the infrastructure of our local communities and states. Moreover, they may play an important role for investors’ asset allocation. We, therefore, believe it’s important to keep in mind the key benefits that municipal bond funds offer, particularly during periods of market change and uncertainty.

    Each of Aquila’s single-state municipal bond funds employs a locally-based approach to tax-exempt investing, providing the portfolio management teams an up-close perspective on the issuers and economy in their respective states. We believe this helps deliver valuable insights regarding the economic and political climate of each state, the financing needs and capabilities of individual issuers, and ready access to multiple sources of information when evaluating the potential risk and return opportunities of a given security. Important characteristics of our Funds include:

    • High-quality municipal bonds – Invests in investment-grade bonds; those in the four highest rating categories, or determined to be of comparable credit quality
    • Intermediate bond portfolio – Seeks to minimize share price volatility or interest rate risk
    • Broad portfolio diversification – Supports a wide range of projects in communities of all sizes throughout the particular state — not only seeking to manage risk, but also improving the quality of life in the state
    • Local portfolio management – Provides an up-close perspective and valuable insights on the issuers and economy in the state

    The investment professionals at Aquila Group of Funds continually draw upon their many years of experience in analyzing securities, observing market and economic cycles, and recognizing risks and opportunities. Our goal is to achieve each Fund’s investment objective of delivering the highest level of income exempt from regular federal and state income taxes, as is consistent with preservation of capital. Since 1984, Aquila continues to take a careful approach for today’s markets and remains firmly grounded in our organization’s Guiding Principles.

    As always, we encourage you to consult with a trusted financial professional who can help ensure that your investment portfolio remains aligned with your individual needs to meet your long-term financial goals. It’s prudent to focus on your goals, your time frame for achieving them, and your tolerance for risk.


    This information is general in nature and is not intended to provide investment, accounting, tax or legal advice, nor is it intended to represent a recommendation or solicitation related to any particular investment, security or industry sector. Market and economic conditions are subject to change. Past performance does not guarantee future results.

    Independent rating services (such as S&P Global Ratings, Moody’s Investors Service and Fitch Ratings) assign ratings, which generally range from AAA (highest) to D (lowest), to indicate the credit worthiness of the underlying bonds in the portfolio. Where the independent rating services differ in the rating they assign to an issue, or do not provide a rating for an issue, the highest available rating is used in calculating allocations by rating.

    Municipal-to-Treasury ratio compares the rates of municipal bonds with those of U.S. Treasury bonds in percentage terms.

    The Bloomberg® Municipal Bond: Quality Intermediate Index tracks the performance of municipal bonds with remaining maturities between 2 and 12 years and a minimum credit rating of A3. Indices are unmanaged and are not available for direct investment.

    BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy of completeness of any information herein, nor does Bloomberg make any warranty, express or implied, as to the results to be obtained therefrom, and, to the maximum extent allowed by law, Bloomberg shall not have any liability or responsibility for injury or damages arising in connection therewith.

    Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. State-specific fund performance could be more volatile than that of funds with greater geographic diversification.

    Before investing in any fund offered by Aquila Group of Funds, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the fund’s prospectus. The prospectus is available from your financial professional, by clicking here, and by calling                800-437-1020.