Municipal Monthly Update May 2025

Key Takeaways:

• Municipals outperformed Treasuries, reversing April’s relative underperformance. Historically attractive yields brought investors off the sidelines, helping the market overcome a weaker technical environment.
• The municipal curve steepened meaningfully, boosting prospects for roll and expected return going forward.
• Macro uncertainty may keep volatility elevated, however, we would likely view any further backup in yields as an opportunity to buy, especially now that the curve has steepened.

MUNICIPAL BOND MARKET UPDATE

• Treasury yields rose in May on mounting deficit concerns, renewed trade uncertainty and rising rates overseas.
• Municipals outperformed Treasuries, reversing April’s relative underperformance that stemmed from trade-related market turmoil.
• The muni curve steepened meaningfully with yields declining at the short end, holding steady in 10-years and up double-digits out longer.
• The 5s/10s slope ended the month at +49bps, a nearly three-year high. The back end shift was even more dramatic with 10s/20s finishing at +97bps, a level not seen since 2014.
• The new issue calendar, which reached a record high for May at nearly $50 billion, was met with solid demand as historically attractive yields coaxed investors off the sidelines.
• The outperformance of municipals led to a richening of relative value ratios from recent highs. The 10-year m/T ratio ended the month 4% lower at 76%.
• Municipal credit spreads were broadly unchanged, with little performance dispersion among investment grade rating categories. Moody’s downgrade of the US sovereign rating didn’t spill over into munis.
• Neither the tax exemption nor any major sector was targeted in the House Committee Tax Bill, removing a key overhang for the market.
• Looking ahead, June is set to open with a very heavy supply calendar, which could pressure the market. However, municipals remain well supported by historically attractive yields, building momentum in industry flows, and strong credit fundamentals.