A steep yield curve, with long-term bonds underperforming, has historically led to strong rebound returns.
Top-rated 30-year munis are currently yielding 4.5%–5%, about a 7.86% taxable-equivalent yield for high earners.1
Long-term munis may offer upside potential if yields fall and help drive gains from any roll-down effects.
Municipal bond investors are facing a rare dislocation in 2025. While most fixed-income sectors have delivered solid returns this year, munis have lagged — especially at the long end of the curve.2 The performance gap partly reflects investor behavior. Many have crowded into short-duration muni mutual funds, leaving long-term muni funds underfunded. This performance divergence has created one of the steepest muni yield curves in years, and with it, a compelling opportunity for long-term investors.
For those able to extend duration, the long end of the muni market offers some of the most attractive yields seen in more than a decade. Top-rated 30-year municipal bonds yield roughly 4.5%–5% today, levels not seen since around 2011.3 These tax-exempt yields translate into tax-equivalent returns in the high single digits for those in upper income brackets. For example, a 4.65% muni yield is about 7.86% pre-tax, rivaling long-term stock return averages but with much lower volatility.
Term |
US Treasury |
Muni |
Muni A |
Muni |
Muni A |
Muni/US |
Muni/US |
|---|---|---|---|---|---|---|---|
10-year |
4.39% |
3.27% |
3.70% |
5.52% |
6.25% |
74.4% |
125.6% |
20-year |
4.94% |
4.35% |
4.91% |
7.35% |
8.29% |
88.0% |
148.7% |
30-year |
4.89% |
4.65% |
5.20% |
7.86% |
8.79% |
95.1% |
160.7% |
Sources: Bloomberg L.P., as of July. 30, 2025. Muni AAA is represented by the Municipal AAA GO bond yield, a Municipal Market Data proprietary yield curve of AAA-rated state general obligation bonds, based on the institutional block size of $2 million+ market activity in both the primary and secondary bond market. Muni A is the Bloomberg Municipal Bond A Index, an unmanaged index of the A-rated municipal bond market. The muni US Treasury ratio compares the muni AAA vs. the yield on the US Treasury. All tax-equivalent yields assume a top tax rate of 40.8%: A 37% federal tax rate, and a 3.8% net investment income tax (NIIT), effective Jan. 1, 2025. The top marginal tax rate applies to single taxpayers with more than $626,350 in taxable income or couples with $751,600 or more. NIIT is the net investment income tax for single taxpayers with more than $200,000 in taxable income or couples with $250,000 or more. Source for tax information is Irs.gov, as of Oct. 22, 2024. An investment cannot be made directly into an index. Past performance does not guarantee future returns.
Importantly, the income comes with limited credit risk. Muni defaults are exceedingly rare for investment-grade issuers. Roughly 72% of the muni bond market is now rated AA or higher,4 reflecting historically strong credit quality across states and cities. High-quality muni mutual funds can allow investors to capture unusually rich, tax-free yields without taking on outsized credit risk.
Plus, when interest rates fall, muni bonds with a steep yield curve experience a "roll down" effect, leading to price appreciation. This happens because as a bond moves closer to maturity, its lower yield is priced into its price, causing the price to rise. This strategy is most effective when the yield curve is steep, as it creates more price appreciation as the bond "rolls down" the curve to a lower, shorter-term part.
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Important information
NA5032744
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Fixed income investments are subject to the credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Credit risk is the risk of default on a debt that may arise from a borrower or issuer of bonds failing to make required payments.
Duration is a measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates. Duration is expressed as a number of years.
A general obligation bond is backed by the credit and taxing authority of the issuer rather than revenue from a project.
Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.
The yield curve plots interest rates at a set point of time for bonds of equal credit quality but differing maturity dates in order to project future interest rate changes and economic activity.
The opinions referenced above are those of the author as of Nov. 10, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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