Opportunities in today’s municipal market

It’s been a bifurcated market between short and long munis. At the short end of the curve, yields have been falling because of expectations that the economy will slow by year-end and that the slowdown will lead to easing by the Federal Reserve. At the long end of the curve, yields have been rising because of uncertainty surrounding tariffs, inflation, and deficit spending, while supply has been increasing. The yield curve has sharply steepened, creating opportunities with longer munis. 

Munis have strong credit fundamentals—defaults are rare among munis with credit ratings of A and higher. And long munis are providing compelling after-tax returns. A yield of 4.80%, for example, is equivalent to 7.62% for someone in the 37% tax bracket—that’s on par with historical average equity returns of 7% to 9%, but with less risk.

Given the current combination of attractive risk characteristics and high after-tax yields—and the richer valuations of other asset classes like U.S. equities—high-quality, intermediate- to long-term munis may be something to consider. The breakeven tax bracket is lower than it generally has been in the past, even with current tax brackets that will be extended past 2025 under recent legislation.

Professional management is paramount in the municipal bond market. There are more than 50,000 issuers of municipal debt. It’s a very fragmented asset class, filled with both opportunities and challenges. The majority of debt beyond 10 years has some form of optionality, call options, sinking funds and, in some cases, prepayment risk. You want to avoid unwanted optionality in volatile interest rate environments. Structure and convexity management can help maximize total returns.

Aging infrastructure is also opening up additional opportunities. Most projects are now being funded using the municipal market versus direct government lending. Discerning professional managers screening for the better opportunities also plays a role here.

I could cite several, but just a few highlights …

By asset size, we’re by far the largest manager of open-end muni funds.¹ We use that scale to our advantage in developing relationships with the Street and structuring deals of interest.

That scale and negotiating power also contribute to our low costs, which means investors in our muni products receive more net tax-exempt income. But it also means we’re very opportunistic and flexible about what we invest in. We can rotate out of undesired positions, unlike some asset managers that tend to hang on to positions even when the fundamentals are deteriorating.

Our team consists of 21 municipal credit analysts, 14 traders, and nine portfolio managers, each with clearly defined responsibilities. However, they all contribute to the active positioning process. At some other firms, team members might be wearing multiple hats, reducing the benefits of both diverse perspectives and a collaborative process.

Note: This interview took place in July 2025 and was edited for length and clarity.