US municipal bond quarterly market recap and outlook

Fourth quarter 2025 recap

The municipal market delivered steady, positive returns during the fourth quarter, despite record levels of new issuance and the longest federal government shutdown in history. Investment grade, high yield, and taxable muni bonds returned 1.42%, 1.11%, and 1.05%, respectively.¹ Longer-duration munis performed particularly well in October, helping to offset some of the underperformance seen earlier in the year, although the momentum slowed in November and December. For 2025 overall, investment grade, high yield, and taxable muni bonds generated positive returns of 4.25%, 2.46%, and 7.89%, respectively.¹ Higher quality muni credits generally outperformed lower quality ones in the fourth quarter and the calendar year.

Key takeaways:

• Muni bonds experienced positive returns during the fourth quarter and for the full 2025 calendar year, with the bulk of the return coming from yield.
• New issuance hit a new record high in 2025, as issuers continued to tap into the municipal market for financing.
• Demand remained strong over the quarter, as investors sought to capture higher yields, and contributed to positive investment flows in 10 out of 12 months of the year.
• Credit fundamentals remained resilient, with most state and local governments maintaining fiscal balance.

Our outlook for 2026

Looking ahead, we see attractive opportunities in munis. With prospects for more Federal Reserve interest rate cuts, steady issuance, and ongoing demand for tax-exempt income, we believe high absolute yields and solid fundamentals make munis a compelling investment choice.

Read the complete quarterly update.

Learn about our municipal bond funds.