The generational opportunity in muni bonds is ‘slipping away’ as yields fall and supply dwindles, strategist says
HS 22/09/2025
Investors who want to take advantage of a generational opportunity to capture attractive income on municipal bonds may not want to wait much longer, according to strategist Tom Kozlik. Yields have already fallen by about 34 basis points — or 0.34 percentage point — since the beginning of September, he said. Bond yields move inversely to prices, so when yields fall, prices rise. “The opportunity for investors to lock in generationally attractive yields is slipping away every day,” said Kozlik, head of public policy and municipal strategy at Hilltop Securities. “The cost of waiting is rising every day.” He expects the downward trend in yields to continue into the beginning of next year, although it may not necessarily come in a straight line. But while yields may not be as high as they once were, they still remain elevated compared to a few years ago, he said. Wealthy investors like munis because they are exempt from federal tax and, if the holder lives in the same state or city in which the bond is issued, free of state and local tax, too. The Schwab Municipal Bond ETF currently has a tax-free 30-day SEC yield of 3.55% and a 0.30% expense ratio. SCMB YTD mountain Schwab Municipal Bond ETF year to date Supply/demand shift A surge in supply is among the reasons municipal bonds’ prices had previously struggled this year. A total of $414 billion in muni bonds were issued this year, through Sept 17, up 13% year over year, according to Bank of America. Many issuers brought their bonds to market earlier this year amid the uncertainty surrounding the Big Beautiful Bill and how it would affect municipal finances and the status of the bonds’ tax exemptions. That supply is expected to slow down through the rest of the year, while demand is already picking up, Kozlik said. “I’m not saying that issuance is going to fall off a cliff,” he said. But “the trend is going to be somewhat lower than we’ve seen in the last year and a half.” At the same time, nearly $7 billion has flowed into U.S. municipal bond funds since August 20, LSEG data show. That trend should continue as investors move into municipals and out of short-term assets, like money market funds, as the Federal Reserve lowers rates, Kozlik said. That combination of slowing supply and increased demand will make it more difficult for individual investors to buy munis, he said. MUB YTD mountain iShares National Muni Bond ETF year to date 2-3 year bull market Bank of America also recently pointed out the shift within the muni bond market. Municipal bonds are the most undervalued asset class year to date, lagging behind Treasurys and corporate bonds, the bank said in a note Friday. That said, munis have outperformed so far in September and should continue to rally through the end of the year, strategist Yingchen Li wrote. “We think now it is more appropriate to take a buy and hold approach given our view that this bull market should run for the next 2-3 years,” he said. “Tax-exempt muni yields should end up surprisingly low when this bull market is exhausted down the road.” The best opportunities for investors are on the intermediate to longer end of the yield curve, said Cooper Howard, fixed-income strategist at Schwab Center for Financial Research. Valuations on the shorter end have become fairly rich, particularly on a relative basis when compared to Treasury yields, Howard said. The municipal-to-Treasury ratio for two- to five-year bonds is about 57%, meaning munis yield about 57% of what similar Treasury bonds yield, he noted. The 10-year ratio is at about 40% and the 30-year ratio is at about 90%, he added. While Treasurys are free of state taxes, they are not exempt from federal taxes. Steepening curve The yield curve was also flat prior to the Federal Reserve rate cuts, Howard said. These days, the yield curve is much steeper, with short-term payouts slipping as the central bank decreases rates, he noted. “Investors are getting better compensated for moving out the yield curve and taking on some duration risk,” he said. Howard anticipates short-term rates will continue to move lower as the central bank eases and wouldn’t be surprised if longer-term yields stay elevated. That said, he isn’t necessarily advocating moving out to 30-year munis because there is still interest-rate risk. “A good starting point is intermediate duration and for most muni investors, that’s about six to seven years on average,” Howard said. A good way to do that is to build a bond ladder of varying maturities, which takes the guesswork out of trying to time interest rates, he said. Howard also suggests the bulk of investments stay in higher-rated munis rated AA and above, since yields are insufficient to compensate for moving into lower-grade assets. Kozlik also prefers higher-grade munis, both general obligation and revenue bonds. In addition, he sees opportunities in the higher-education sector, which has been beaten up. Bonds from large universities are still a good place to find value, in general, but investors should check their credit and make sure enrollment trends aren’t dropping, he said. (Learn the best 2026 strategies from inside the NYSE with Josh Brown and others at CNBC PRO Live. Tickets and info here .)
