Municipal Bonds: Supply, Yield Curve, and Investment Strategies

Municipal Bond Market Performance

• 📈 Municipal bonds have delivered solid returns for investors so far this year, despite a complex market environment.
• ⚠️ The market has navigated challenges including a new administration, tariffs, and shutdowns, demonstrating resilience.

The Dominance of Supply

• 📊 Heavy new issuance is the primary narrative for municipal bonds in 2025, with expected supply around $550-560 billion, up from $500 billion last year.
• 🏗️ Issuance is driven by infrastructure projects and government needs, rather than low interest rates, making it less interest-rate sensitive.
• 🚀 Expectations are for continued heavy issuance in 2026, potentially reaching $522-620 billion.

Yield Curve Dynamics and Credit Spreads

• 🎢 The municipal bond yield curve is significantly steeper than the US Treasury curve, with a 2-to-30-year spread of 160-170 basis points.
• 📉 This increased supply has led to widening credit spreads as the market absorbs the paper.

Investment Vehicles and Strategies

• 💡 While individual bonds are preferred by some clients, mutual funds and ETFs (including active ETFs) are becoming more efficient ways to access the market.
• 🎯 For individual investors, a co-mingled vehicle is recommended to leverage a research team's expertise in managing municipal bond portfolios.
• 🔍 Staying on top of issuer financials, like those of Beth Israel Lahey Health, is crucial for individual bondholders but challenging without dedicated research.