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The municipal market got off to a modestly positive start in thethird quarter as strong summer technicals provided a tailwindto both absolute and relative performance. Plenty of investorcash and modest supply were major themes that led to frothy valuations. The good times, however, were short lived. Treasury yields continued to rise, and with the reversal of bullish technicals as the Fall approached, municipal yields soared in August and September.

September 2023 was the worst performing month for munis since last September. The Bloomberg Municipal Bond Index, returned -3.95% over the three months ending September 30th, 2023. The Bloomberg Municipal High Yield and Taxable Indices returned -4.24% and -3.70%, respectively, for Q3’23. Similar to prior quarters, there wasn’t a shortage of marketmoving headlines impacting Treasury yields. Additional Treasury issuance, decreased foreign demand, a U.S. sovereign debt rating downgrade, and a hawkish Fed meeting in September that signaled less interest rate cuts than expected next year all contributed to the rise in yields.
Municipals underperformed Treasuries as benchmark muni yields rose across the curve. The Bloomberg 3yr Index ended the quarter 74bp higher at 3.89%. The Bloomberg 1-10 Index closed at 3.92%, 81bp higher, and the Bloomberg Muni Agg Index climbed 80bp, reaching 4.32%.

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