Municipal Fixed Income Investment Strategy January 2024

January 12, 2024 — Sage answers the 4 big questions (outlook for macroeconomic growth, Fed policy, valuations, and investor sentiment) and illustrates our municipal fixed income positioning in the current environment.

Market Outlook

• Yield levels, although off their recent highs, still represent an attractive entry point, especially if the economy continues to slow and Fed policy becomes more dovish. The municipal market provides a well-supported backdrop as credit quality remains stable and tax-exempt yield carry remains attractive.
• The coming shift to lower rates will drive price returns positive and benefit longer duration strategies the most. Credit challenges will inevitably develop; however, the initial phase of the slowdown will be relegated to the higher-beta/lower-rated municipal sectors.
• Sage’s barbell allocation will benefit when the inverted 2s5s curve experiences a bull-steepening. We remain committed to our strategic overweight to single A credits, and as we progress through 2024, we will gradually shift some of our higher-beta/lower-credit quality sectors and credits into lower-beta/higher credit quality as economic challenges become more pronounced. Finally, Sage will continue to tactically leverage volatility events, as they represent some of the most attractive entry points.