Projections released by the Central Bank signal that interest rates are expected to remain unchanged for several years. The latest dot plot shows thirteen of seventeen officials projecting rates on hold through 2023, one member projecting a rate hike in 2022, and three seeing rates above zero in 2023. The Federal Reserve does not expect inflation to reach the two percent level until 2023. Officials also expect the unemployment rate to extend its decline, with median projections calling for an unemployment rate of 4 percent by 2023.

Tax-exempt municipal bonds traded flat in September. The broad market, as measured by the Bloomberg Barclays Municipal Bond Index, posted a gain of 0.02 percent for the month, bringing year-to-date total returns to 3.33 percent. The AAA municipal benchmark yield curve saw minor steepening over the course of the month. Municipal yields in the two-year range concluded the month 0.02 percent lower while ten and thirty-year yields ended September higher by 0.03 and 0.05 percent, respectively.

Municipal bonds with maturities near five-years led performance for the month, returning a positive 0.16 percent. Longer dated municipal bonds, which are categorized as those with maturities greater than twenty-two years, ended the month lower, posting a negative 0.14 percent return for the month. Year-to-date returns are led by the seven-year maturity range, which have returned a positive 3.79 percent through September month end. Shorter-dated muni bonds with maturities in the one to five-year range have returned 2.70 percent year-to-date.

While investment grade tax-exempt bonds ended the month roughly flat, September marked the fifth consecutive month of high yield (below investment grade) outperformance. High yield municipals, as represented by the Bloomberg Barclay’s Muni High Yield Index, extended their march higher in September, returning .10 percent. High yield municipals are now up 18.56 percent from the coronavirus sell-off low reached on March 20. Investment grade municipals have returned 11.75 percent over the same period. Despite this streak of positive relative performance, high yield municipals remain behind year-to-date, with total returns reflecting a positive 0.37 percent since the start of the year.

September issuance was comparable to the same month last year, however year to date issuance remains elevated at 24 percent higher year-over-year. Taxable municipal issuance has been the largest contributor to this year’s supply volume. Advanced refundings have led year to date taxable issuance to make up 30 percent of the year’s total municipal supply. In comparison, last year’s taxable issuance represented 12 percent of total supply. Historically, taxable issuance has made up only 5 to 10 percent of total supply. The surge in this year’s taxable issuance represents a 203 percent increase year-over-year.

Tax-free municipals currently offer more than 100 percent of the yield of Treasury bonds across the curve. The two-year Muni-Treasury ratio, which represents the AAA benchmark muni yield as a percent of Treasury yield, ended at 111.6 while the ten-year ratio ended the month at 122.1. Demand continues to remain strong with municipal funds posting their 20th week of consecutive inflows. However, with the presidential election right around the corner, municipal bonds may see a pickup in volatility as investors search for clarity around potential income tax changes and additional stimulus measures.