US municipal bond quarterly market recap and outlook

Second quarter 2025 recap

The financial markets were volatile during the second quarter, but muni bonds remained resilient overall. Investment grade, high yield, and taxable muni bonds returned -0.12%, -1.14%, and 0.81%, respectively, for the quarter.¹ Higher quality muni credits generally outperformed lower quality muni credits, as did shorter duration bonds compared to longer duration bonds.¹

Key takeaways:

• Muni performance was volatile during the second quarter, as uncertainty about US trade tariffs and federal government policies sparked interest rate volatility.
• New issuance remained elevated but was well absorbed by the market.
• Investment flows were positive for the quarter, benefiting from the start of the summer reinvestment season and easing tariff fears.
• Longer-dated munis offered attractive yields, especially relative to Treasurys, as long-term municipal yields rose significantly.

Our outlook

Given predicted Federal Reserve (Fed) rate cuts for the second half of the year and steady new issuance, we see opportunities in the muni bond market due to high absolute yields and strong fundamentals. At quarter end, municipal bonds were offering attractive yields compared to Treasuries, but once the Fed resumes cutting rates, there may be a significant and lasting drop in yields. In essence, investors could get paid to wait by investing in municipals now and collecting attractive income while waiting for rates to eventually come down.

Read the complete quarterly update.

Learn about our municipal bond funds.