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

Two high-profile bankruptcy filings by leveraged US borrowers—both of which face allegations of fraud—have reverberated across financial markets and raised questions about the stability of alternative credit. When considering the implications of these bankruptcies for lenders and investors, we believe it’s important to understand the instruments involved.

The headline-grabbing troubles of Tricolor Auto Group and First Brands Group, for example, primarily impacted broadly syndicated loans and other more esoteric forms of credit. Syndicated loans—also referred to as bank loans, leveraged loans, tradeable credit and other terms—are extensions of credit to noninvestment grade borrowers that are arranged and administered by large banks, who solicit participation in the deals by institutional investors like mutual funds and collateralized loan obligations (CLOs).

Given that the institutions participating in these syndications are not negotiating the terms of the deal, gaining access to information that supports due diligence efforts can be a challenge; many leveraged borrowers are private companies with limited public disclosures, and direct engagement with borrower management teams is often not available. Moreover, competitive dynamics in recent years have eroded the structuring power of syndicated lenders, resulting in an increasingly “covenant lite” market. In their efforts to offset these limitations, institutional investors generally construct broadly diversified loan portfolios.

Syndicated loans should not be confused with direct lending, which refers to the direct origination of loans by nonbank lenders. Direct lenders partner with borrowers—typically, noninvestment grade borrowers smaller in size than those who participate in the syndicated loan market—and their private equity sponsors to originate customized financing solutions, enabling one-on-one access to management teams and significant influence over loan structures.

The nature of the direct lending relationship generally enables lenders to apply more rigorous underwriting discipline, ensure greater protections in loan terms and act more proactively when signs of stress emerge. As a result, direct lending historically has experienced lower default rates and higher recovery rates than syndicated loans.¹