Taxable municipal bonds: room to run

Year-to-date, taxable municipal bonds have returned 6.43%, marking the best start to a year through the third quarter since 2020. While taxable municipals have slightly underperformed corporate bonds in 2025, their spread advantages over similarly rated corporates provide a solid runway for additional gains.

Key takeaways:

• Compelling entry points: Municipals have underperformed the corporate market year-to-date, creating opportunities for the asset class to continue recent positive momentum.
• Strong fundamentals: Municipal credit remains resilient, with tax revenue collections and reserves at all-time highs despite slowing economic data elsewhere.
• Seasonal factors: An uptick in new issuance could create attractive buying opportunities for active managers.
• Credit selection: As sector-specific challenges widen performance gaps between stronger and weaker credits, disciplined security selection becomes increasingly critical to achieving optimal portfolio returns.

Fed cuts rates, more to come?

The Fed cut rates 25 bps in September, which was largely anticipated by the market. The Fed further updated its forward guidance from 25 bps of additional rate cuts to 50 bps for the balance of the year, despite inflation running marginally above expectations.

The bigger surprise for the quarter was a weakening labor market, with jobless claims hitting a new post-Covid high of 263,000 in August alongside a general trend of slowing job creation. The Fed’s emphasis on employment downside risks despite “somewhat elevated” inflation supports expectations for continued easing, with markets currently pricing in 100 bps of additional cuts by year-end 2026.

Given this backdrop of declining interest rates for short maturity paper, investors can capture meaningful yield increases by moving out of cash — which is likely to continue to experience lower yields as the Fed pursues additional rate cuts — and rotating into higher yielding municipal bonds.