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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.
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The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
Investing involves risk; principal loss is possible. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments. This information should not replace an investor’s consultation with a financial professional regarding their tax situation.
This information does not constitute investment research as defined under MiFID.
