Have Munis Solved Their Technical Issues?

Municipal bond performance for the year to date flipped from slightly negative to solidly positive during the third quarter, as easing technical headwinds set the stage for a late-period rally. We’re hopeful that this represents an inflection point for the market.

Perhaps more impressive than the magnitude of returns during the quarter was the fact that they were achieved in the face of continued heavy new issue supply. While third quarter muni bond issuance was down slightly from the second quarter, the year-to-date pace suggests 2025 is likely to top 2024’s record for annual volume.

Fortunately, demand appears to be back. After about $9 billion of outflows during late March and April alongside the initial shock of Trump’s tariff policies, positive municipal bond fund flows returned in May and have persisted since.¹ It seems likely to us that the factors driving flows—credit stability, certainty around tax treatment, an accommodative Fed and relatively benign tariff impacts to date—should continue to support the asset class.

With a yield to worst of 5.7%, the Bloomberg Municipal High Yield Index offers investors an attractive entry point, in our view.² Although the outperformance of munis during the third quarter pushed muni-Treasury ratios somewhat lower, current levels suggest there is still significant relative value to be found on the longer end of the municipal bond curve, which—given the curve’s current steepness—is also the segment most likely to benefit from stable or falling interest rates.³