The Week in Muniland

December kicked off with a slower start last week. The market grappled with volatility in the US Treasury market and the last big week of supply in the tax-exempt market. The yield curve steepened, with two-year AAA yields falling 1 basis point (bp) while 10- and 30-year yields rose 2 and 5 basis points, respectively. The Bloomberg Municipal Bond Index (the Index) returned –0.12% last week, bringing year-to-date returns to 4.03%.

• Why it matters: Despite the negative absolute performance, municipals did outperform US Treasuries, with after-tax spreads tightening 2-7 basis points across the curve. That outperformance is notable given issuance volume, with roughly $16 billion pricing last week. Demand was a key contributor to that outperformance, as the market saw $736 million in inflows according to Lipper. Year-to-date inflows now sit at $48 billion, with exchange-traded funds reaping about $31 billion of those inflows. In addition to inflows last week, the market was aided by December 1 reinvestment cash from coupon payments and maturities. Supply next week will begin to taper off as we approach year end, with roughly $10 billion of tax-exempts expected to price.

Following a standout October, November performance in the municipal market was more muted, with the Index returning 0.23%. What should investors expect as we close the chapter on 2025?

• Why it matters: Despite modest November performance, technicals have remained strong—something we expect to continue. Net supply for December is anticipated to be –$3 billion, meaning that there will be roughly three billion in additional cash from maturities, calls and coupon payments compared to expected issuance. Now that the market has cleared the last large week of supply for the year, we expect technicals to strengthen further. Over the last 10 years, the Index has generated positive returns in December nine times, with an average December return of 0.63%. Fortunately for investors, yields remain elevated (Display 1), and income is the engine of bond returns. Additionally, a barbell maturity structure can potentially enhance returns, allowing investors to not only take advantage of compelling valuations on both the front- and long-end of the curve, while also benefitting from strong absolute performance if yields fall (Display 3).

The National Association of State Budget Officers released its Fall 2025 Fiscal Survey of the States, highlighting the fact that despite slowing revenue growth, states remain in a strong fiscal position and credit quality continues to be strong.

• Why it matters: Per the report, following the two fastest growing years for general fund revenue in fiscal 2021 and fiscal 2022, growth in revenue collections has been modest in each year since. From fiscal 2023 through 2025, annual general fund revenue growth on a median basis has been between 1% and 3%, and the median increase projected for fiscal 2026 is 0.3%. Slower revenue growth is largely a function of slower economic growth and lower inflation, combined with some recently adopted tax reductions in various states. To be clear, however, revenue collections are still growing but albeit at a slower pace compared to prior years. Despite slowing revenue growth, rainy-day funds (RDFs) remain strong. RDF balances swelled to a total of $183 billion at the end of fiscal 2024, which is more than twice the aggregate level in 2019 and matches the all-time high the year prior. While RDF levels declined modestly in fiscal 2025 to $174 billion, the majority of states are expected to maintain—or further grow—their RDF balances in 2026. The significant flexibility maintained by states to adapt to changing revenue environments, combined with strong reserves, should give investors confidence in the underlying strength of municipalities.