Municipal bonds continue to be a core component of fixed-income portfolios, especially given their tax-advantaged income and historically low default rates. But the 2025 landscape introduces a set of different risks and opportunities for both investors and issuers. As the rate cycle turns, fiscal pressures evolve, and the political climate remains fluid, municipal bond market participants must reassess their risk and reward appetite to better understand the evolving environments.
1. Potential Rate Cycle Reversal: The Return of Duration and Opportunity
Investor Perspective:
After an aggressive tightening cycle that saw the Fed Funds rate peak above 5%, the Federal Reserve is signaling a potential shift toward easing as inflation moderates and economic growth decelerates. This pivot could present a potential re-entry point into longer-duration municipal securities, which stand to benefit from duration-driven price appreciation as rates come down. The steepening of the yield curve, particularly the normalization of the front end, will enable investors to capitalize on the price appreciation of long-duration bonds purchased at higher coupons, relative to where the markets may be headed.
In this context, tax-equivalent yields on high-grade municipal bonds remain attractive relative to corporate counterparts, particularly for investors in high marginal tax brackets.
dividend.com
by Jayden Sangha
May 06, 2025