Expectations for Muni Returns, Fund Flows, and Credit Fundamentals

According to the year ahead edition of the municipal market guide, UBS predicts positive annual returns for munis in 2024. They expect this to be driven by the anticipated downward trend in U.S. treasury rates, aligning with a softish landing for the U.S. economy. The report also highlights the significant gain in muni returns seen in November, up by over 6%, outpacing U.S. treasury securities. As a result, UBS expects increased investor demand for munis, leading to a reversal of outflows and a return of fund flows. In terms of credit fundamentals, UBS anticipates a decline in rating upgrades compared to a potential economic slowdown, but still expects upgrades to outpace downgrades. Most municipal sectors are expected to have a stable outlook, with exceptions for private colleges and not-for-profit hospitals.