September 2025 review and outlook
Market review
In September, AAA-rated tax-exempt municipal bond performance was positive across the curve. The Bloomberg Municipal Bond Index posted a total return of 2.3% for September. 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 generally lower across the curve, with municipals outperforming compared to Treasuries. The yield ratios decreased by 2 ratios in five years, decreased by six ratios in 10 years and decreased by four ratios in thirty years.
The best performing states were Arkansas, Wyoming and New Hampshire. The weakest performers were Puerto Rico, New Mexico and Connecticut. The highest outperforming revenue sectors were Hospital, Housing and Education, while the weakest performers were Tobacco, IDR/PCR and Resource Recovery. By quality, BBB-rated municipals were the strongest performers, followed by AAA, A and AA-rated municipals, respectively.
The US Bloomberg Aggregate-eligible Taxable Municipal Bond Index generated a total return of 1.66%. Credit spreads on the index tightened by 1bp and spreads for the credit long index tightened by 5bp.
Monthly municipal issuance was $45bn, above the average for the month over the past 5-years. Taxable municipal issuance represented just 4% of September’s supply.
Muni fund flows were positive for September, with inflows averaging $975m per week. ETF fund flows were positive for September, with inflows averaging $800m per week.
Outlook
We expect elevated financial market volatility is likely to continue amid ongoing uncertainty around tariffs, geopolitical alliances, and overall policy change prospects tied to federal funding, among others. We remain vigilant with maintaining well diversified, high-quality portfolios consisting of solid fundamental credits that we believe are well-positioned to withstand pressures from potential policy changes in Washington. We also would view any market dislocation stemming from federal policy uncertainty as a potential buying opportunity.
Uncertain changes to federal policy could drive heightened volatility in credit conditions as we move through 2025. We believe a more cautious approach to credit selection would be prudent, with an increased emphasis on balance sheet strength, liquidity and operating flexibility. Essential service sectors, including public power and water/sewer, remain relatively safe investments due to their predictable and stable cash flows through economic cycles. Healthcare is facing potential headwinds stemming from potential cuts to Medicaid, which could have an outsized negative impact on smaller, rural hospitals. Threatened cuts to federal grants and potential changes to endowment tax rates are driving negative headlines among many of the higher rated colleges and universities, yet we believe these institutions have substantial resources to withstand the cuts and would view any spread widening as a buying opportunity. We continue to see value in the transportation sectors although airports with heavy reliance on international travel are likely to see some softening in demand.
Our duration posture is targeted to be modestly longer versus respective benchmarks. The recent backup in municipal yields along with yield curve steepening has made the current environment more attractive for modest duration extension. The prospect for transitory impacts of higher inflation from fiscal and tariff policy from the new administration along with the Fed’s dovish bias may keep the slope of the curve elevated and rangebound in the near term.