Municipal Monthly

Monthly Municipal Market Update, December 2022

A brief update on what's happening in the municipal bond market.

Figure 1 is a table showing AAA Municipal Market Data (MMD) yields, U.S. Treasury yields, and taxable-equivalent municipal yields as of December month-end, specifically at the two-year, five-year, 10-year and 30-year tenors of each curve. The table shows that taxable-equivalent yields on AAA municipal bonds ranged from 4.39% for the 2-year tenor to 6.05% for the 30-year tenor in December. Taxable-equivalent yield assumes 37% federal income tax and 3.8% Medicare investment tax. A separate box below the table includes a few additional data points as of 31 December 2022, such as year-to-date municipal issuance of $396.8B, year-to-date municipal fund flows of -$121.6B, year-to-date investment grade municipal performance of -8.53%, and year-to-date high yield municipal performance -13.10%. Data is sourced from Bloomberg, The Bond Buyer, PIMCO analysis of Bloomberg data, Thomson Reuters TM3 MMD Interactive, and Refinitiv Lipper.

December month in review

U.S. equities and fixed income each closed out the 2022 calendar year in negative territory as the economy grappled with historic inflation, the fastest Federal Reserve (Fed) tightening cycle in decades, and geopolitical conflict. Primary dealer research currently indicates that more than two-thirds of economists at 23 of the U.S.’s largest investment banks and trading firms expect a recession in 2023, while others predict a downturn in 2024.

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Tax Loss Harvesting and Muni Bonds

Tax Loss Harvesting and Muni Bonds

Municipal bond yields have more than doubled this year, and valuations look attractive. David Hammer, head of municipal bond portfolio management, and John Nersesian, head of advisor education, discuss today’s muni opportunities and the benefits of tax loss harvesting.

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Disclosures

Past performance is not a guarantee or a reliable indicator of future results.

Investing in municipal bonds involves the risks of investing in debt securities generally and certain other risks. Investors will, at times, incur a tax liability. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increases this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. 

The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.

Bloomberg Municipal Bond Index consists of a broad selection of investment-grade general obligation and revenue bonds of maturities ranging from one year to 30 years. It is an unmanaged index representative of the tax-exempt bond market. The index is made up of all investment grade municipal bonds issued after 12/31/90 having a remaining maturity of at least one year. The Bloomberg High Yield Municipal Bond Index measures the non-investment grade and non-rated U.S. tax-exempt bond market. It is an unmanaged index made up of dollar-denominated, fixed-rate municipal securities that are rated Ba1/BB+/BB+ or below or non-rated and that meet specified maturity, liquidity, and quality requirements. The Bloomberg Taxable Municipal Index represents a rules-based, market-value weighted index engineered for the long-term taxable bond market. For inclusion in the Index, bonds must be rated investment grade quality or better, have at least one year to maturity, have a coupon that is fixed rate, have an outstanding par value of at least $7 million, and be issued as part of a transaction of at least $75 million. The Intermediate Municipal subsector groups together securities with an average maturity between one to 10 years. The Bloomberg 1-10 Year Municipal Bond Index is an unmanaged index considered to be generally representative of investment-grade municipal issues having remaining maturities from 1-10 years and a national scope. The Bloomberg Muni Short (1-5) Index is the Muni Short (1-5) component of the Bloomberg Municipal Bond Index. It is not possible to invest directly in an unmanaged index.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for information purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2023, PIMCO.

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