2025 Presents: A Unique Municipal Bond Opportunity

As of writing in August 2025, Municipal Bond valuations are presenting a compelling buying opportunity for US Taxable investors. A combination of oversupply, tax policy and political uncertainty has contributed to a marked underperformance for municipal assets year to date. Credit fundamentals have nevertheless remained strong for municipalities in Colorado and nationwide, and credit spreads have remained historically tight for HY municipal bonds. Looking ahead for the rest of the year, continued inflows to municipal assets, moderate new issues, and resolved policy uncertainty could set Munis up for a reversion towards long-term relative valuations.

Municipal Bonds Lag Behind YTD 2025

Municipal Bond total returns stand out so far this year as the lagging sector within the US Fixed Income market.

Net municipal fund flows were -$9.6b from March through April, as investors processed market gyrations during the tariff-inspired bear market. Thereafter, sentiment reversed, and weekly Muni flows have been positive from May through July, totaling +$11.3b. As we often note, in times of market volatility large investors often tap their conservative Muni allocations to cover shortfalls. The positive flows since May demonstrate municipal’s strong momentum heading into the latter half of the year.

Municipal issuers came to the market in force so far this year, JP Morgan reported that as of June 30^th, issuance totaled $256b, a 49% increase from the 5y 1^st half average. This wave of new paper contributed to a supply-side driven buyers’ market for Munis.  

Analyzing the Muni yield curve versus U.S. Treasuries, longer dated Munis have sold off on a relative basis, as seen below through higher relative yields. Overall, Muni yields remain within their relative range established since COVID.

Attractive municipal yields, particularly for longer dated maturities, are compounded when taking taxes into account. For high income earners in Colorado, tax-equivalent yields for 10yr and 30yr AAA rated Munis are currently 5.09% & 7.36% respectively, 0.82% & 2.51% higher than comparable U.S. Treasury yields. Considering the credit and duration risk components of bond investing, we feel the risk-adjusted after-tax returns are quite compelling for high-net-worth investors.

The largest influence in 2025 is unfortunately the most mercurial, which is the political and policy risks which affected municipalities across the nation. The municipal bond tax exemption received considerable attention as a potential target for federal legislators during the DOGE and budget review months. However, in the end the One Big Beautiful Bill (OBBBA) left the tax exemption untouched. Broader tax policy uncertainly such as the State and Local Tax (SALT) deductions and public university debates also provided volatility.

A Bright Outlook for Munis

Heading into the latter half of the year, an attractive fundamental set-up is forming as Muni new issuance normalizes and tax uncertainty has been significantly reduced. 2025 is expected to mark the largest Municipal Bond market issuance ever, but most of the alpha has already occurred, H2 is projected to return to more normal supply levels. Additionally, the flurry of legislative headlines seem to have passed with OBBBA signed and a new global trade framework settling into place as trade deals and tariffs take effect. Lastly, we are expecting the Fed to cut at least twice this year in-line with market expectations providing further encouragement to retail investors to re-engage in municipal bonds.

To summarize, normalized new issuance, a more dovish Fed, reduced policy uncertainty and continued inflows could all support Munis throughout the remainder of 2025. For more information on how Yule Creek navigates Colorado’s Municipal Bond Market, please visit our website or reach out for a consultation.

Sources:

Bloomberg. (n.d.). Bloomberg Indices. Retrieved August 12, 2025, from https://www.bloomberg.com/professional/product/indices/

S&P Dow Jones Indices. (n.d.). S&P Indices. Retrieved August 12, 2025, from https://www.spglobal.com/spdji/en/indices/

ICE Data Services. (n.d.). Long-term mutual fund flows. Retrieved August 12, 2025, from https://www.theice.com/market-data/mutual-fund-flows

Municipal Securities Rulemaking Board. (n.d.). ICE yield curves. Retrieved August 12, 2025, from https://emma.msrb.org/ToolsAndResources/ICEYieldCurve?daily=True

New York Life Investments. (2025). 2025 municipal market insights: Midyear update. Retrieved August 12, 2025, from https://www.newyorklifeinvestments.com/insights/2025-municipal-market-insights-midyear

Disclosures:

This content has been prepared for informational purposes only and should not be considered as investment, tax, or legal advice. Opinions and forward-looking statements expressed are subject to change without notice. We recommend all investors consult with a financial and/or tax advisor regarding their individual circumstances before making investment decisions.

Investing in bonds exposes the investor to the risk of loss of principal. Lower and non-rated securities are more volatile and less liquid than investment-grade bonds. Liquidity risk relates to the timing of converting a security into cash without affecting the market price. Municipal bonds and preferred stocks tend to be less liquid than government or corporate bonds. Higher-yielding, longer-maturity, lower-rated, non-rated, or certain bond restrictions (minimum denomination requirements) may limit or reduce the liquidity of bond holdings.

Please visit our website for a complete list of disclosures and risks: www.yulecreek.com.