Market Overview

The municipal bond market remains cautious, influenced by concerns over upcoming economic data and stock valuations. Trading activity is concentrated on select names and structures, while the yield curve has held largely steady through November. Overall, the curve between 1 and 30 years has flattened, with the exception of a steepening between 10 and 30 years — creating potential value opportunities for investors.

Defensive investment strategies are emerging, as some municipalities raise property taxes to cover budget shortfalls, signaling increased caution among market participants. Large Aaa/AAA municipal offerings like Ohio Waters and New York City Waters are attracting demand for tax-exempt yields (TEYs) close to or above 5%. In some cases, certain maturities are delivering even higher yields for top-income bracket investors.

Market Liquidity

Secondary sales are down, but over $40 billion in new municipal bonds issued this month match redemptions. Short-term bonds (0-1 year) now dominate trading, mainly from customer buys, while intermediate maturities (8-12 years) see less activity. Long-term bonds remain favored for their curve and yield advantages, with investors preferring 2040 over 2035 maturities.

BWIC (Bids Wanted in Competition) volumes have fluctuated yet generally exceed recent averages, with hit ratios staying within the 50%-57% range. Interest remains broad across various durations, credit ratings, sectors, and coupons, leading to increased bid wanted volumes. Customer purchase yields have fallen most noticeably at the short end and in money markets.

Fund Flows

Fund flows are mixed: open-end mutual funds have outflows, while ETFs — mainly short-term ones — see inflows. A recent fund acquisition caused a brief outflow, but overall net inflows remain positive, especially for ETFs. Year-to-date, total inflows are $44.2 billion, led by ETFs and focused on long-term, investment-grade credits. Money market assets remain high, offering yields around 2.70%, which compete with floating-rate bonds.

Forward Outlook

Heading into late 2025, the municipal bond market reflects careful investor positioning in response to ongoing economic uncertainty. There is steady, focused demand and a nuanced balance of supply, yield dynamics, and sector-specific trends. The market demonstrates resilience and offers select opportunities for higher yields, tempered by signs of investor fatigue and variability in fund flows.

Over the next 30 days, net supply is projected to be negative $12 billion, indicating strong absorption of new issuance. December is expected to see a pause in primary issuance, which could stimulate activity in the secondary market.