The Week In Muniland

The grind higher in returns continued as the muni market recovers from its post–“Liberation Day” drubbing. For the week, two- and 10-year AAA yields fell 7 and 1 basis points (bps), respectively, while 30-year AAA yields were up 1 bp. The Bloomberg Municipal Bond Index (the Index) returned 0.11% last week, bringing year-to-date returns to –0.26%.

• Why it matters: Following the horrendous three-day period of April 7–9, when the Index was down 5.18%, the Index has returned 3.88%. Since April 9, the muni market has outperformed the US Treasury market, as seen through the lens of after-tax spreads (Display 3). From that perspective, shorter bonds are now fair value, while long bonds remain cheap. Mutual fund/ETF flows are a big reason why the short-end bonds have outperformed. Only 24% of flows in mutual funds/ETFs are going into bonds longer than 10 years. That lack of love for the long end of the curve has also contributed to the steepening of the curve. Investors should keep in mind that no one can predict the absolute level of yields, but what can be done with a far greater degree of reliability is predicting which way the yield curve is going to shift. The muni curve will not remain as steep as it is (Display 1). The only question is, when does it return to a less-steep slope? While investors are waiting, they are clearly being compensated in the form of higher yields. The average five-year AAA yield is 2.55%, while 20-year AAA bonds are yielding 4.31%.
  
  

As we look toward the second half of 2025, how should muni investors be thinking about the muni market in terms of positioning and potential risks?

• Why it matters: Muni investors are seemingly more comfortable with the muni market, as weekly mutual fund/ETF flows have been positive for 11 consecutive weeks. However, as noted, flows are primarily going into short/intermediate and high-grade bonds. Our Municipal Midyear Outlook: Hold Fast, Stay Agile provides some guidance as to how investors should be positioning in today’s environment. In a nutshell, own munis given how high yields are (outside of some points in 2022 and 2023, investors have to go back to 2008/2009 to find an equivalent yield environment). Don’t be afraid of adding some duration today given the cheapness of long bonds. Own long bonds. The most attractive part of the curve is arguably the 15- to 20-year part, but given the continuing steepening of the curve, anywhere along the 10- to -20-year part looks attractive. Selectively own A, BBB rated and high yield. Spreads are not as attractive as they were last year, but you are being compensated in terms of additional spread. Finally, stay active. Sticking your head in the sand is no way to manage a bond portfolio in any environment, and especially not in today’s market.

Following the outcome of the New York City Democratic mayoral primary, we have received many questions about Zohran Mamdani and the potential impact to New York City’s credit quality should he become mayor.

• Why it matters: Even if Mamdani wins the general election, parts of his agenda will require the support of the City Council, which holds substantial power over budget approvals. New York City mayors have historically faced challenges pushing through large-scale reforms without broad council support. New York State also exerts significant control over the city’s fiscal policies and directly controls most of the city’s tax rates. The state will likely be skeptical of endorsing any changes that could be materially credit-negative. From a fiscal perspective, the city is in very good shape, as it has $8.45 billion in reserves, expected to end the fiscal year (ending June 30) with a cash position between $13.8 billion and 15.8 billion and has a surplus of $2.34 billion for fiscal year 2025. The next mayor will likely have limited ability to materially worsen the city’s credit quality.