With the volatility and some of the uncertainty behind us, there are many indicators that the second half of the year has the potential to post significantly better returns. The FOMC is close to ending their aggressive cycle of tightening, removing the upward bias in rates.
Municipal bonds are relatively attractive to Treasuries as the ratio of tax-exempt yields versus taxable yields across the entire curve have cheapened substantially. New issuance this year will be lower than average and should result in a demand/supply imbalance. Finally, yields on many municipal bonds are substantially above equivalent maturity Treasuries, with tax-equivalent yields as high as 300 – 400 basis points above Treasuries and significantly above the current inflation rate.
From J.P. Morgan Asset Management:
The two economic indicators which should add the most to a positive market will be inflation and the employment numbers. While there may still be some lag from the inflationary pressures we have experienced, inflation has been on a downward slope and as the rate hikes start to take hold, the decline should accelerate. The non-farm payroll numbers over the last year have been impressively strong but they are also a lagging indicator and should soften going forward due to the aggressive Fed actions.
With all the positive indicators and the higher overall yields, the market may have created a favorable entry point for investors looking to increase income with the potential of long-term capital appreciation.