The global economy is navigating choppy waters as trade tensions and tariff disputes roil markets. In this risk-off environment, investors are seeking stable income streams with minimal exposure to equity volatility. Municipal bonds, often overlooked in favor of flashier assets, now offer a compelling opportunity. Their widening yield advantage over Treasuries, tax-advantaged returns for high-income investors, and resilient credit fundamentals make them a strategic anchor for portfolios. Let’s dissect why now is the time to embrace these often-overlooked securities.
Technical Imbalances: A Widening Yield Premium
The muni/Treasury yield spread has reached its most favorable levels in decades. As of July 2025, a 30-year AAA municipal bond yields 94% of a comparable Treasury—but on a taxable-equivalent basis (assuming a 37% tax rate), this jumps to 158% of the Treasury yield. This spread widening, driven by record issuance and supply pressures, has created a technical imbalance favoring munis.
This data reveals a clear divergence: muni yields have outpaced Treasuries as investors flee equities and seek safety. Even with elevated supply—$256 billion issued in the first half of 2025, 49% above the five-year average—the demand for tax-exempt income remains robust. Short-term munis, such as the Bloomberg 3-Year Municipal Index, now yield 5.02% on a taxable-equivalent basis, a 112-basis-point advantage over taxable money market funds. These technical dynamics signal that munis are pricing in both supply pressures and their inherent demand resilience.
aiinvest.com
by Cyrus Cole
Tuesday, Jul 15, 2025 5:18 pm ET