"Munis set to Reap Cash as Fed Cuts Rates" ~ Alliance Bernstein

Munis Set to Reap Cash as Fed Cuts Rates, AllianceBernstein Says
2025-12-18 18:54:45 GMT


By Erin Hudson
(Bloomberg) -- Municipal bonds are likely to lure money as
Federal Reserve interest-rate cuts lead investors to look for
new places to park their cash, says Matthew Norton at
AllianceBernstein, and he pointed to debt sold for affordable-
housing projects as an appealing sector.
The Fed last week lowered rates for a third straight time,
and traders expect more cuts in 2026, further reducing returns
on the $8 trillion sitting in US money-market funds. Norton
expects that munis, and in particular higher-yielding munis,
will draw some of that cash.
“When investors are looking for a place to lock in higher
yields when cash interest rates go down, what offers the best
tax-equivalent yield is tax-exempt credit,” the firm’s chief
investment officer for municipal bonds said in an interview.
AllianceBernstein manages $89 billion in munis.
The seven-day yield on the Crane 100 Money Fund Index,
which tracks the 100 largest funds, was 3.78% as of the end of
November, down from 4.28% at the end of 2024, according to Crane
Data.
That decline in the yield on cash “is leading to some
additional flows into the muni market,” Norton said. “The last
several months have actually been quite strong where money has
flowed into the municipal bond market.”
Muni mutual funds have seen net inflows of $50 billion this
year, after drawing $46 billion in 2024, according to a Western
Asset report.
The expectation that investors will move out of money funds
as the Fed reduces borrowing costs is a common refrain across
asset classes, including stocks. For now, however, there’s
little sign of a major exodus, according to Crane figures, in
part because the funds yield more than cash alternatives such as
bank deposits.
Traders expect the Fed to cut twice more in 2026 to support
the economy, and that outlook is creating a bullish backdrop for
bonds. The broader US fixed-income market is on track for its
best year since 2020, earning about 7%, according to Bloomberg
index data. The tax-exempt debt market has returned 4%.

Offering Support

Rate cuts could also support weaker credits offering higher
yields. Norton says he’s looking at longer-dated tax-free munis
in the lowest tier of investment grade, which he said yield
close to 5%. He’s also focusing on munis for affordable housing.
“That is a very good place to pick up additional yield
because the demand for affordable housing units is very high,”
he said. “And even if the economy were to slow, affordable
housing occupancy generally remains very high.”
Of course, higher yields come with added risk. Norton cited
a couple for the sector, such as the task of finding residents
to fill newly built properties and the construction process.
The US public-finance housing sector is on a “stable
footing,” S&P Global Ratings said in a report this month.
“Demand for affordable housing will remain high,” amid
elevated home prices and the burden of rental costs, the report
said. “Housing affordability will continue to be a key policy
issue and we expect that it will retain broad bipartisan
support.”
Read more: Americans Are Getting Priced Out of
Homeownership at Record Rate
Norton also pointed to airport-related munis and prepaid
gas bonds as areas where investors can pick up extra yield.

--With assistance from Alexandra Harris.