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CONTRIBUTORS

Ben Barber, CFA

Director, Municipal Bonds,
Franklin Templeton Fixed Income

Jennifer Johnston

Director of Research, Municipal Bonds, 
Franklin Templeton Fixed Income

Preview

Monetary policy tightening cast a shadow over bond markets in 2023. Going forward, we expect a more constructive backdrop for fixed income investors.

In the face of a persistently strong US economy, the US Federal Reserve (Fed) had to continue tightening monetary policy throughout most of 2023. However, policymakers made an unexpectedly dovish pivot in December, as encouraging macroeconomic data put interest-rate cuts on the table. Our economists are not yet certain that the fight against inflation has been won and are concerned that the last mile of disinflation may prove to be bumpier than markets expect.

Nevertheless, investors are more optimistic going into 2024. The heightened levels of volatility witnessed in 2023 weighed on municipal (muni) bonds, with the sector witnessing significant retail fund outflows. But we believe monetary policy easing and declining yields should provide a tailwind for bond markets over the coming year.

This article covers state general obligation bonds (GOs), land-secured bonds and charter-school bonds.

The muni-bond market is deep and diverse and can offer some compelling opportunities even in a slowing growth environment.

  • First, credit fundamentals remain stable, and we have observed a generally prudent fiscal approach.
  • Second, technical supply/demand conditions have the potential to be constructive for the muni-bond sector going forward.
  • Third, when compared to corporate debt, tax-exempt muni bonds tend to display lower default characteristics.

We therefore remain constructive on the muni-bond asset class in 2024 but believe that rigorous bottom-up research will be particularly important in finding those credits that can weather even a challenging market environment.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.

Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.

Active management does not ensure gains or protect against market declines.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

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