For the quarter, the Bloomberg Long-Term Municipal Index feel -3.95%.
The third quarter of 2023 was more of the same that we’ve seen all year, as continued volatility battered the fixed income market. July returns were positive due to a high level of reinvestments and low issuance. Unfortunately, stronger economic indicators in August and September resulted in a re-evaluation of the projected interest rate increases by the Federal Reserve, fueling a significant rise interest rates.
While the third quarter was extremely difficult for investors, we believe the fourth quarter is shaping up to be more positive as the technical outlook for the municipal bond market is firming up. Due to higher yields, new issuance for the upcoming quarter is expected to drop significantly versus the same quarter last year. This drop is on top of an already lower than expected issuance and year to date basis. This lack of new issuance could result in an outperformance versus other fixed income assets regardless of the direction of rates.
The recent rise in long-term interest rates is having a secondary tightening effect on the economy in addition to the historic rise in short-term interest rates. Considering the lag effect of the increase in short-term interest rates, we would expect to see a softening in the economy late in the fourth quarter or early in the first quarter of 2024. We believe this should drive longer term interest rates down while putting pressure on the Federal Reserve to lower interest rates sometime in 2024.