Time to shine: Municipal bonds are coming into favor

2025 municipal market outlook

Municipal yields are set to end the year higher than where they started, and we believe muni bonds continue to be a compelling asset class that can offer investors attractive taxable-equivalent yield. We are bullish on municipal fixed income given attractive current yields and solid credit fundamentals. We believe municipal bonds have upside potential in well-diversified, long-term portfolios for investors looking past broader economic trends and focusing on strong fundamentals.

Key takeaways on municipal activity

• The U.S. Federal Reserve has reduced inflation, but now the market is focused on fiscal policy. Keep an eye on taxes.
• Municipal bond yields and spreads are compelling, which should garner demand across investment grade and high yield municipal bonds.
• Supply is expected to remain elevated, driven mainly by issuers’ pent-up demand for infrastructure projects amid acceptance of a higher-for-longer rate environment.
• Demand continues to favor owning duration. Investors do not want to miss out.
• Muni credit is strong but requires discerning credit research. Republican control in Washington is not expected to materially shift municipal credit trends.