With the beginning of the yr, several asset managers and investment firms are starting to publish their outlooks for the yr ahead for each the equity and fixed-income markets.
For investors and financial advisors, these outlooks can function a blueprint for asset allocation decisions, sector rotation, and extra investment. For municipal bond investors, which means taking note of what asset managers like Nuveen should say.
The firm was one in all the primary to start underwriting municipal bonds before 1900 and has since grown into one in all the world’s largest municipal debt managers. As such, its bench strength throughout the sector is impressive. So, when the firm talks about munis, investors should listen. With that, a latest paper by the group highlights what investors should expect this yr.
A Positive 2024
After a tumultuous few years, the sleepy municipal bond sector returned to its “boring” nature. Driven by strong demand, short supplies, and robust taxable-equivalent yields, munis performed well in 2024.
Taking a look at data provided by Morningstar, we see that the broader municipal bond market and various subsectors managed to offer positive total returns. National investment-grade intermediate muni bonds — that are the benchmark of the sector — managed to provide a complete return of 1.89%. Long bonds yielded a return of two.35%, while investment-grade short term munis offered a mixture of gains and interest of two.54%. Those investors seeking to the high-yield market saw a robust 4.95% total return.
Overall, those are good total returns for the sector. Nonetheless, they’ve include some volatility. The last quarter of the yr experienced significant price drops for a wide range of municipal bond sectors because the Federal Reserve (Fed) began to slow the pace of rate cuts, inflation increased, and political uncertainty began to affect the markets.
What’s ahead for the municipal bond sector? Will investors see similar results, and where should they focus their attention to realize the very best return? Asset manager Nuveen can have the reply. Of their recent whitepaper, Nuveen outlines five key takeaways and themes for the 2025 municipal market.
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1. Monetary to Fiscal Policy Shifts
For starters, current monetary policy concerns will give technique to fiscal policies. And that might provide a backdrop for extra municipal bond gains. In line with Nuveen, the Fed has done an excellent job of fighting inflation and has largely gotten it under control. While CPI and other inflationary metrics have begun to tick up in recent readings, they’re still well below the Nineteen Eighties-style numbers seen just a couple of years ago. With that, the Fed’s rate cuts have began to matter less.
What is going to drive munis is the rising need for fiscal and tax policies. Nuveen expects several key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) to be prolonged under President Trump. Nonetheless, as potentially positive as these tax cuts are, they’ll result in higher taxes in a while. This provides a backdrop for municipal bond ownership.
2. Low Valuations vs. Other Investment-Grade Bonds
With rising fiscal policy concerns, municipal bonds currently have a bonus. Yields and valuations are still at very compelling levels. The recent pullback in muni bond prices has only enhanced that fact further. Taking a look at historical data, the 10-year municipal-to-treasury ratio has been 84%. In line with Nuveen, a shift during the last five years has allowed ratios to maneuver lower, with sub-70% ratios the brand new norm. This provides a compelling valuation and spread between Treasuries and municipal bonds. This chart from Nuveen summarizes their findings and highlights discounts for each 10-year and 30-year maturities.
3. High Municipal Bond Supplies
After diminished supplies in 2022 and 2023, last yr saw a return of many issuers to the muni market. In line with Nuveen, muni issuance through October 2024 was 43% higher than last yr at $436 billion. While higher supply could also be counterintuitive at first glance, it might be good for muni investors.
That’s because yields are already high. Higher supplies of munis may keep a lid on prices but will allow investors to enjoy a much greater yield or money return. That’s key since it sets munis back on target to be a low-volatility asset class. Furthermore, it makes them more attractive in comparison with other bonds reminiscent of investment-grade corporates, which have also seen supplies rise during the last yr. Currently, munis offer high yields and high taxable equivalent yields, providing a greater money return than other taxable bond types.
4. Rising Muni Demand
The very best part is that the increasing supplies have been met with strong and growing demand, keeping the market in balance. In line with Nuveen, the municipal market still has room to recuperate. Last yr, strong inflows in muni funds and ETFs of $28.7 billion were seen. That’s been great for matching current supplies. Nonetheless, it doesn’t come near the $170 billion outflows that 2022 and 2023 saw. There’s still more demand potential.
Nuveen suspects that demand will come back toward the tip of 2025 and into 2026 as returns on money and cash-like asset classes will prompt many investors — specifically high-net-worth investors — to return to the muni market. This may help absorb additional supplies and boost overall demand.
For investors today, that is an important time to lock in yields (due to high supplies/low valuations).
5. Improving Credit Quality
Finally, Nuveen highlights the credit quality of municipal issuers. Despite some recent hiccups, many states and native governments are still flush with money. Rainy day funds are strong, while proactive budget cuts have begun to work their magic. Consequently, Moody’s data show the variety of credit standing upgrades has continued to outpace downgrades by a 3-to-1 margin through the beginning of the yr.
Specializing in Munis
With these strong tailwinds in tow, Nuveen expects that 2025 might be one other great yr for municipal bonds and their investors. The sector’s strong current yields, coupled with some potential demand drivers, will help generate a robust total return in comparison with other fixed-income types.
On that note, overweighting munis or adding an allocation makes a ton of sense. Nonetheless, like many fixed-income sectors outside of treasuries, buying individual munis could also be a tricky nut to crack. To that end, betting on various ETFs and funds is smart. Energetic management could play a major role in boosting the performance of a muni bond portfolio.
Energetic Municipal Bond ETFs
These ETFs were chosen based on their ability to offer low-cost and energetic exposure to the municipal bond market. They’re sorted by their 1-year total return, which ranges from 1.9% to 9.1%. They’ve expense ratios between 0.07% and 0.65% and assets under management of $240M to $3B. They’re currently yielding between 2.9% and 5%.
| Ticker | Name | AUM | 1-12 months Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| HYMU | iShares High Yield Muni Income Energetic ETF | $244M | 9.1% | 4.4% | 0.35% | ETF | Yes |
| NEAR | iShares Short Duration Bond Energetic ETF | $2.96B | 5.1% | 5% | 0.25% | ETF | Yes |
| CGMU | Capital Group Municipal Income ETF | $2.59B | 3.3% | 4.2% | 0.27% | ETF | Yes |
| SMMU | PIMCO Short Term Municipal Bond Energetic ETF | $630M | 3% | 2.9% | 0.35% | ETF | Yes |
| VTES | Vanguard Short-Term Tax Exempt Bond ETF | $561M | 2.4% | 2.9% | 0.07% | ETF | Yes |
| FMB | First Trust Managed Municipal ETF | $2.04B | 2.3% | 3.3% | 0.65% | ETF | Yes |
| MUNI | PIMCO Intermediate Municipal Bond Energetic ETF | $1.75B | 2.3% | 3.3% | 0.35% | ETF | Yes |
| DFNM | Dimensional National Municipal Bond ETF | $1.42B | 1.9% | 5.2% | 0.19% | ETF | Yes |
Passive Municipal Bond ETFs
These funds were chosen based on their exposure to municipal bonds at a low price. They’re sorted by their one-year total return, which ranges from 1.8% to six.5%. They’ve expense ratios between 0.05% and 0.35% and assets under management between $2.8B and $42B. They currently offer yields between 2.4% and 4.4%.
| Ticker | Name | AUM | 1-year Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| HYMB | SPDR Nuveen Bloomberg High Yield Municipal Bond ETF | $2.86B | 6.5% | 4.4% | 0.35% | ETF | No |
| VTEB | Vanguard Tax-Exempt Bond ETF | $39B | 2.1% | 3.2% | 0.05% | ETF | No |
| SHM | SPDR Nuveen Bloomberg Short Term Municipal Bond ETF | $3.65B | 1.9% | 2.4% | 0.20% | ETF | No |
| MUB | iShares National Muni Bond ETF | $41.1B | 1.8% | 3.1% | 0.05% | ETF | No |
All in all, Nuveen’s thought process highlights why municipal bonds must be an element of your fixed income allocation this yr. Demand and high yields will ultimately profit investors and result in positive total returns.
Bottom Line
Municipal bonds had an excellent 2024, providing strong total returns. In line with Nuveen, the brand new yr also guarantees to be strong. Low valuations, high yields, and changes to tax policies all bode well for the sector and investors going forward.