Municipal Fixed Income Investment Strategy, July 2025
July 16, 2025 — Sage provides an outlook for the municipal market, including our sector views and positioning.
Key Takeaways
- Economic and Policy Landscape: Despite intermittent signs of weakness, the US economy remained resilient in Q2, prompting the Federal Reserve to hold rates steady, though softening indicators suggest easing may resume later in 2025 amid persistent market caution.
- Market Performance: Municipal bonds underperformed in the first half of 2025, with both IG and HY indices posting negative returns due to rate volatility, heavy supply, April’s selloff, and fund outflows, despite the resolution of major policy uncertainty.
- Municipal Outlook: Sage maintains a cautiously optimistic municipal outlook, favoring long-dated maturities amid expectations of a 10%–15% decline in new issuance in the second half of 2025, while trimming return expectations due to limited price appreciation and persistent short-term volatility driven by policy shifts and supply-demand imbalances—prompting a nimble approach to curve positioning and a recommendation to extend duration if 30-year Treasury yields exceed 5%.
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