(Bloomberg) -- Charles Schwab’s Cooper Howard is predicting a bounce back year for the $4 trillion municipal debt market in 2023.
A slower pace of interest-rate hikes, attractive yields and relatively healthy state and local government finances should lure investors back after demand plunged this year, the director and fixed-income strategist for the Schwab Center for Financial Research said in a Bloomberg TV interview Wednesday.
“Credit quality is very high in the municipal bond market. State and local revenues have surged to record-level highs driven by the economic recovery,” Howard said. “Given the rise in yields, it is more attractive for retail investors, so there will be more demand coming into the market.”
Municipal-bond sales this year are down nearly 19% at about $351 billion, according to data compiled by Bloomberg. Meanwhile, 10-year muni yields are more than double where they were at the start of 2022.
The Federal Reserve’s aggressive interest-rate hikes and recession fears had soured investors on the municipal-bond market, but signs of ebbing inflation will lend the Fed leeway to relax on its tightening, Howard said. “Rising interest rates will not be as big of a headwind.”
Issuance will remain relatively subdued since municipal coffers are at record-high levels thanks to last year’s windfall of federal stimulus funds.
The threat of a recession still looms, but not as large in the muni market thanks to healthy credit ratings for states and municipalities that saw more upgrades than downgrades this year. That bodes well for state and local governments in the event of an economic downturn.
“If the economy does slow, we do not think it will be as big of a headwind in the muni market as other parts of the credit markets,” said Howard.
With airline travel bouncing back, Howard expects municipal debt tied to the public transportation sector to lead the market rebound and sees it as “an area of opportunity” for skittish investors.
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