M UpdateMunicipal Strategy | North AmericaThat's a Wrap: December Data PackPositive total returns continued in December while excess returns slowed. Munis ended the year with 6.5% total and 1.7% excess returns, $380bn in issuance, and sub 60% ratios 10 years and in. For the year, mutual funds realized $16bn in aggregate outflows, while ETFs saw $14bn of inflows. Morgan Stanley & Co. LLCBarbara A Boakye, CFAStrategist Barbara.Boakye@morganstanley.com +1 212 761-1654 Mark T Schmidt, CFAStrategist Mark.Schmidt1@morganstanley.com +1 212 296-8702 Recent Reports • 10 Care Leaders: Ranking Single-A & AA Hospital Credits - We prefer AAs > As. Among AAs, our order of preference is Intermountain > Kaiser > UCal Med > Ascension > Trinity. Among single-As, our order of preference is Sutter > UPMC > CommonSpirit > TJU > Providence.• California: Deficits Return - The state revised down its revenue outlook, and now forecasts a revenue gap of about $60bn between this year and next. It makes a "tough choices" budget more likely for 2024-2025. Given the state's ample liquidity, it's too early to call spread impacts from the news.• The More Yields Change, the More Flows Stay the Same - As our economists recently noted, the "courage to do nothing" is what matters right now. We don't have an edge in an "everything rally," especially as munis weren't cheap to start. Flows ex-ETFs are still negative. We expect flat excess returns in Dec., with ordinary seasonals in 1Q. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.Key TakeawaysBroad muni market ended the year with positive total returns. HY outperformed IG, while the long end and transportation sector outpaced counterparts.SMAs continued to drive demand and valuations keeping the front and intermediate part of the curve rich even as mutual fund outflows continued. Total supply fell 3% YOY, driven by a decline in taxable issuance, which fell 31%, offset by tax exempt issuance, which increased 3%.10s 30s steepness peaked at 120bp, levels not seen since 2014. Ratio spreads averaged 22% over the year. Relative value versus corporates tightened YOY with the market implied tax rate averaging 38% versus 33% in 2022. January 2, 2024 11:51 PM GMTM Update2Realized Returns Exhibit 1:Tax-Exempt Excess Returns-1.031-0.9111.398-1.4041.269-0.57-0.9070.2762.5980.2880.962-0.674-0.144-0.6570.0251.3470.404-0.894-1.076-0.213.126-0.404-3-2-1012343/224/225/226/227/228/229/2210/2211/2212/221/232/233/234/235/236/237/238/2...
