The Case for Munis: Beyond the Comfort of Cash

GW&K Insights | September 2025

In our second installment of “The Case for Munis,” we highlight the risks of staying in cash, and the compelling opportunities that tax-exempt bonds offer in today’s market.

The sharp rise in yields that started in 2022 has resulted in historically weak trailing returns for municipal bond investors. The response for many has been to retreat to the safety of cash. With money market rates hovering around 4%, this may feel like a rational decision, but risks associated with maintaining that positioning have increased dramatically. Not only are money market rates set to decline, but we are also seeing the most compelling entry point for the muni market in the last 15 years (Figure 1).

As you can see in Figure 2, short rates, by the Fed’s own projections, are set to fall by 100 basis points (bps) over the next two years. As that process plays out, cash-heavy investors will see their income/returns decline significantly.

Meanwhile, the extreme steepening of the muni yield curve has increased the penalty for remaining in cash and reduced the “risk” of taking on duration. In Figure 3, we show three potential paths for rates based on the Fed’s projections. While a rising rate environment results in a slightly lower return than money market funds, flat and declining rate scenarios produce a clear advantage for owning bonds.

To be sure, no one can predict the exact path long-term rates will take after the upcoming Federal Open Market Committee meetings, but history has repeatedly shown that, when the Fed is easing, leaning into duration has been a winning strategy (Figure 4).

So yes, 4% cash seems like a logical decision but it is this very risk aversion that has created an opportunity for those willing to add a modest amount of duration. We think the time is now to at least leg into the market.