Municipals

US municipal bond quarterly market recap and outlook

March 31, 2025

Mark Paris

Chief Investment Officer, Head of Municipal Strategies, Invesco Fixed Income

Tim Spitz

Head of Municipal Business Strategy and Development

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First quarter 2025 recap

The muni market got off to a volatile start in 2025. January and February posted gains, benefiting from a seasonal imbalance in supply and demand. The favorable market technicals reversed in March, and muni generally declined. Worries about the potential impact of President Trump’s tax-policy, as well as layoffs from the federal government workforce, may have further unsettled investors. For the first quarter overall, investment grade, high yield, and taxable muni bonds returned -0.22%, 0.82%, and 2.99%, respectively.¹ Investors in the tax-exempt space continued to favor lower credit quality bonds, helping high yield muni bonds outperform investment grade munis.

Key takeaways:

Muni bonds generated mixed results, with the first quarter marked by interest rate volatility and heightened policy uncertainty.
Investment flows were positive overall for the quarter, though they turned negative in March, which was partly due to tax season selling.
Supply remained at record levels, with new issuance higher than normal at the beginning of the year.
Longer duration munis offered attractive relative value, as they hit their cheapest levels versus US Treasurys in recent months.²
Hospital and higher education credits face headwinds from federal funding cuts and other Trump administration policies.

Our outlook for 2025

With multiple Federal Reserve rate cuts predicted for 2025 and steady new issuance, we see opportunities in the muni bond market due to high absolute yields and strong fundamentals. In the near term, we expect continued financial market volatility. Munis may benefit, as they’ve historically been a refuge for investors during turbulent periods and may add value to a portfolio by helping to mitigate risk.

Read the complete quarterly update.

Learn about our municipal bond funds.

1
Source: Bloomberg L.P., as of March 31, 2025. Investment grade municipal bonds are represented by Bloomberg Municipal Bond Index. High yield municipal bonds are represented by Bloomberg Municipal High Yield Bond Index. Taxable municipal bonds are represented by the Bloomberg Taxable Municipal Index. An investment cannot be made into an index. Past performance does not guarantee future results.
2
Source: Thomson Reuters, as of March 31, 2025. Municipal valuations grew more attractive, as muni bonds broadly lagged Treasurys. A key indicator of relative value is the municipal-to-Treasury (M/T) ratio, where the greater the ratio, the cheaper muni bonds appear compared to Treasurys. At quarter end, the thirty-year AAA-rated M/T ratio stood at its highest level since the November US presidential election, having risen 15 percentage points from its six-month low of 78% on December 11, 2024. The M/T ratios of five-, ten-, and thirty-year AAA-rated municipal bonds were 72%, 77%, and 92%, respectively, at the end of the first quarter versus 66%, 67%, and 80%, respectively, at the end of 2024. A yield curve is a curve showing several yields to maturity or interest rates across different contract lengths for a similar debt contract. The Municipal AAA General Obligation bond yield is represented by the Municipal Market Data proprietary yield curve of AAA-rated state obligation bonds, based on the institutional block size of $2 million-plus market activity in both the primary and secondary bond market. Past performance does not predict future returns.