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Municipal Bonds: A Promising Outlook for the Second Half of 2025

In today’s issue we will talk about Municipal bonds and not dividend-bearing shares. They’re not the same but these bonds are poised for a strong second half of 2025, continuing their recovery from the tariff-induced selloff in April, which Bank of America now views as a buying opportunity.

Strategist Yingchen Li noted on June 6, “We believe the opportunity to add duration exposure for munis is again presenting itself in the near term,” predicting the rally will persist through the year.

Attractive Yields and Tax Benefits

Favored by high-net-worth investors, municipal bonds offer income exempt from federal taxes and, in many cases, state taxes for residents of the issuing state.

Yields remain compelling, with the iShares National Muni Bond ETF (MUB) boasting a 30-day SEC yield of 3.74%.

Tom Kozlik, head of public policy and municipal strategy at Hilltop Securities, urges investors to seize these payouts, warning, “When [the opportunity] shuts, it could shut pretty quickly.”

Economic Drivers

Despite the scheduled lifting of reciprocal tariffs, Li does not expect municipal bond yields to revisit their peaks. A slowing economy, evidenced by the Institute for Supply Management’s May services index nearing recessionary levels, could foster a favorable Treasury rates environment, boosting the muni rally.

Li added, “If the Treasury market were to take a bullish turn in a more sustainable way, we expect munis to follow in stride.”

BlackRock’s Bullish Stance

BlackRock is equally optimistic, noting that munis outperformed Treasurys in May despite modest negative returns.

Patrick Haskell, head of BlackRock’s municipal bonds group, views the current market as a buying opportunity, citing elevated issuance, attractive valuations due to macroeconomic uncertainty, and easing concerns over tax exemptions following a House budget reconciliation package. Seasonal supply-demand dynamics are also expected to shift to net negative supply in the summer, historically driving strong performance.

Strategic Investing

Kozlik emphasizes selectivity amid normalizing credit conditions, as Covid-era funding for local governments dwindles. While some credits remain strong, investors must ensure state and local governments can cover ongoing expenses with revenues.

Barbell Strategy

Both BlackRock and Bank of America advocate a barbell strategy:

• BlackRock prefers essential service, airport, prepaid gas, housing, and select state/local government bonds, favoring front-end and 20-year yield curve exposure.

• Bank of America is overweight A- and BBB-rated munis and AMT bonds for those not subject to the alternative minimum tax.

With solid yields, tax advantages, and favorable economic and seasonal trends, municipal bonds present a compelling opportunity for investors in the second half of 2025. Strategic selectivity and a barbell approach can help maximize returns in this dynamic market.

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.