October 2025 review and outlook
Market review
For October, The Bloomberg AAA-rated Tax-exempt Municipal Bond Index performance was positive across the curve. Both the high-grade tax-exempt yield curve and the Treasury yield curve flattened. The ratio of AAA-rated tax-exempt municipal yields to US Treasury yields was mixed across the curve, with municipals with maturities of 10 years and longer outperforming compared to Treasuries. The yield ratios increased by two ratios in five years, decreased by three ratios in ten years and decreased by one ratio in thirty years.
The best performing states were Wyoming, Maine and Rhode Island. The weakest performers were Puerto Rico, New Mexico and Alabama. The highest outperforming revenue sectors were Hospital, Housing and Education, while the weakest performers were IDR/PCR, Tobacco and Resource Recovery. By quality, BBB-rated municipals were the strongest performers, followed by A, AA and AAA-rated municipals, respectively.
The US Agg-eligible taxable municipal index generated a total return of 1.32%. Spreads for the taxable municipal index tightened by 7bps and spreads for the credit long index widened by 4 bps.
Monthly municipal issuance was $59bn, above the average for the month over the past 5 years. Taxable municipal issuance represented 10% of October’s supply.
Muni fund flows were $6.5bn for October. ETF fund flows were positive for October, with inflows averaging $1.4bn per week.
Outlook
Municipal bonds saw a strong return in October. The Bloomberg Municipal Index (tax-exempt) outperformed both Treasury and corporate benchmarks in the quarter – reversing its year-to-date lag – thanks to an improving supply/demand backdrop. Demand remained solid year-to-date. Looking ahead the potential for a further rate rally could support additional asset-class inflows. Primary issuance at $490bn year-to-date (up 15% year-over-year) is on record annual pace. Supply typically peaks in October before tapering into year-end as tax-exempt reinvestment flows and seasonal demand firm the technical backdrop. Municipal yields remain elevated by historical standards and are attractive on a taxable-equivalent basis (TEY), with the Bloomberg Muni Index’s TEY ending October at 6.0%.
Municipal credit remains robust in our view, underpinned by the large reserves and cash balances that issuers have built up in recent years. Those strength factors helped drive rating upgrades for both New Jersey and Connecticut in the second quarter. However, several executive actions by the current administration – if allowed to stand – could create adverse credit pressures across broad segments of public finance. Early signs suggest that tariffs, federal workforce reductions, & mass deportations are slowing economic growth, which may weigh on state and local income and sales tax revenues.
From a sector standpoint, we favor revenue‐producing areas like public power and water/sewer utilities, which benefit from independent rate‐setting, essential services, and relatively predictable cash flows. Conversely, we are under-weight in sectors with lower yield premiums – such as state and local general-obligation bonds and pre-refunded issues. We remain cautious on hospital bonds amid margin pressures and anticipated Medicaid cuts, with a tilt toward larger health-system issuers in growth markets. Above all, we emphasize geographic and sector diversification while targeting issuers with resilient balance sheets and strong fiscal flexibility.
Federal policy shifts under the current administration have introduced some uncertainty into credit conditions, but most municipal sectors remain well-positioned to absorb any headwinds. Through August 15, 2025, rating agency activity shows upgrades outnumbering downgrades in nearly every sector, Higher Education and Water/Sewer being the primary exceptions. In this climate, a more cautious credit selection framework is advisable, with heightened focus on issuers’ balance-sheet strength, liquidity and operational flexibility. And while 2025 has seen limited hurricane activity to date, we continue to stress the importance of embedding climate risk analysis into the investment process.
The US economy is slowing, and while we maintain a “no recession” base view, the outlook is increasingly vulnerable to downside risks as the effects of tight policy via tariffs and immigration crackdowns continue to reverberate across the economy. While the Fed may still be concerned with the full inflationary effects of tariffs, rising labor market stress should bias the Fed toward more easing in 2026. We maintain a duration stance that is neutral to slightly long versus our benchmarks. A steep yield curve represents compelling value out toward the long-end of the maturity spectrum. We believe this segment can produce attractive relative returns as demand is likely to pick up under an accommodative Federal Reserve. A barbell curve posture may be favorable with exposure to short maturities which should benefit from further Fed easing while longer maturity bonds offer attractive yield in a relatively steep curve environment.