Municipals

Thoughts from the Municipal Bond Desk

Bridge from underneath

Key takeaways

Solid gains

1

Muni bonds produced solid gains in September, but heavy supply in October, however, could put pressure on prices, increasing the attractiveness of their yields.

Shutdown impact

2

The federal government shutdown fuels headlines, but it’s not expected to have a lasting impact on investment performance.

Liabilities declined

3

Average state pension liabilities declined in 2024, improving their long-term financial leverage and fixed cost metrics.

Here’s our insight and perspective on what’s happening in the muni market, including supply and demand, credit trends, and a quick look at key muni data points.

Tim: Muni bonds generated some impressive gains in September. Were you expecting this kind of performance?

Mark: I expected to see the market advance, given that September is historically a positive month for munis, but I didn’t foresee the strength of the gains. Muni bonds turned in their strongest monthly performance since December 2023 and their best September performance since 2009.1 Although I remain optimistic about muni performance for the fourth quarter overall, I think we may see some pressure for the rest of October. It has historically been the last heavy supply month of the calendar year. Over the past five years or so, October new issuance has averaged between $50 and $55 billion.2 There’s a silver lining, however. Price weakness may provide investors with an opportunity to put more money to work in the Muni market at attractive yields.

Tim: We’re currently in another government shutdown, which is the fifth in the last 25 years.3 Large parts of the federal government stopped operating on October 1, after Congress failed to pass legislation to keep it funded. Should investors be worried?

Mark: I don’t think they should be especially concerned. As you pointed out, this isn’t the first government shutdown, and I think it’s unlikely to be the last. Eventually, a spending bill will be passed by Congress, and the government will reopen, with minimal impact on the country and on investors’ portfolios.3 Of course, a shutdown and the media noise around it can be unnerving, but it shouldn’t be a reason for investors to change their long-term investment plans. Adhering to a long-term plan is one of the most effective ways to manage one’s investments, in my opinion. The Invesco Municipal Bond team doesn’t react to short-term events either. We continue to focus on our time-tested process, taking a long-term view. In my experience, it’s the best way to provide value for investors.

Tim: We’ve talked a lot about the fundamental health of state credits. We saw more good news on that front when Moody’s put out a report highlighting states’ improved ability to service their long-term pension liabilities.

Mark: Yes, and as a result, their financial picture looks brighter. The risk of pension investment losses causing major budget shocks has been a moderate concern, historically. That risk has lowered lately, as pension and other post-employment benefit liabilities have declined and revenue has grown moderately.4 The average pension contributions’ share of revenue has lowered to a median of 5.0%.4 Pension contributions also remained strong in fiscal 2024, as more than two-thirds of states contributed above necessary levels, up from half in fiscal 2021.4 I'm cautiously optimistic that states will continue to practice fiscal responsibility with regards to their pension liabilities.

Read the complete article, including munis by the numbers.

  • 1

    Source: JP Morgan, as of Sept. 29, 2025.

  • 2

    Source: Barclays, as of Sept. 26, 2025.

  • 3

    Source: Invesco, as of Sept. 25, 2025.

  • 4

    Source: Moody’s Ratings, as of Sept. 19, 2025.

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