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MARKETS
24 June 2025

Weekly Municipal Monitor—Federal Reserve Muni Holder Data

By Sam Weitzman

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Macros, Markets and Munis

Municipals posted positive returns last week as Treasury yields moved 2-4 basis points (bps) lower across the curve, while high-grade munis generally followed rates lower. Amid global geopolitical tensions, retail sales data trended lower and came in below expectations ahead of the Federal Reserve’s (Fed) June meeting. Fed officials left the fed funds rate target range unchanged at 4.25% to 4.50%, but continued to highlight 50 bps of cuts expected this year. Meanwhile, muni supply remained elevated despite the holiday-shortened week. This week we highlight newly updated Flow of Funds data from the Fed.

Muni Issuance Remained Elevated Despite the Holiday

Fund Flows (up $111 million): During the week ending June 18, weekly reporting municipal mutual funds recorded $111 million of net inflows, according to Lipper. Short and short-intermediate categories recorded the majority inflows at $211 million, collectively. Long-term funds recorded $93 million of outflows, intermediate funds recorded $8 million of outflows and high-yield funds recorded $58 million of inflows. Last week’s inflows marked an eighth consecutive week of inflows and led year-to-date (YTD) inflows higher to $9 billion.

Supply (YTD supply of $271 billion; up 25% YoY): The muni market recorded $9.5 billion of new-issue supply last week, remaining near elevated levels despite a holiday-shortened week. YTD new-issue supply of $271 billion is 25% higher than the prior record year’s pace, with tax-exempt issuance up 9% and taxable issuance up 26%, respectively. This week’s calendar is expected to increase to $15 billion. The largest deals include $1.5 billion Los Angeles Revenue Anticipation Notes and $885 million North Texas Municipal Water District transactions.

This Week in Munis: Federal Reserve Muni Holder Data

Earlier this month the Fed released updated Flow of Funds data highlighting the primary holders of municipal debt through the first quarter of 2025. According to the data, the size of the municipal market declined by 0.5% in 1Q25, which is relatively consistent with the Bloomberg Municipal Bond Index return of -0.2% for the same period.

Exhibit 1: Municipal Debt Outstanding
Municipal Debt Outstanding
Source: Federal Reserve, Western Asset. As of 12 Jun 25. Major state and local tax revenue is not seasonally adjusted. Select the image to expand the view.

The holders data indicated a continued shift away from institutional investors toward an individual buyer base, extending a trend that began in 2018 when corporate tax rates were lowered to 21%. In the first quarter, insurance companies, bank municipal holders, and non-US municipal holders saw declines of $7.9 billion (-2.1%), $7.5 billion (-1.5%) and $4.3 billion (-3.6%), respectively. Meanwhile, the largest growth segments were among ETF and individual households, which increased by $4.4 billion (+3.2%) and $3.4 billion (+0.2%), respectively.

Exhibit 2: Muni Debt Holders—Institutions vs. Households
Muni Debt Holders—Institutions vs. Households
Source: Federal Reserve, Western Asset. As of 12 Jun 25. Major state and local tax revenue is not seasonally adjusted. Select the image to expand the view.

While ETFs garnered $4 billion of assets in 1Q25, open-end fund assets declined by $10 billion. The first quarter ETF growth extended a strong $36 billion, 35% year-over-year (YoY) growth trend that outpaced the $24 billion, 2.4% YoY growth rate of legacy open-end funds.

Exhibit 3: Open-End Funds vs. ETFs AUM
Open-End Funds vs. ETFs AUM
Source: Federal Reserve, Western Asset. As of 12 Jun 25. Major state and local tax revenue is not seasonally adjusted. Select the image to expand the view.

As institutional investors continue to step away from traditional municipal assets, the market is becoming increasingly concentrated among individual retail buyers and ETF allocations, which are often incorporated into model portfolios. Given the relative liquidity challenges associated with the municipal market, we anticipate that this concentration could lead to near-term bouts of volatility. However, such volatility can present long-term income and total return opportunities for active managers who are able to navigate these evolving liquidity dynamics.

Municipal Credit Curves and Relative Value

Exhibit 4: Muni Credit Curves
Muni Credit Curves
Source: Bloomberg, Western Asset. As of 20 Jun 25. Bloomberg Valuation Service (BVAL) Municipal Credit Indices (AAA, AA, A, BBB, respectively) and US Sovereign Curves. Taxable-Equivalent Muni Credit Curves consider the top marginal effective tax rate of 40.8%. AA Muni is represented by the US General Obligation AA Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured AA General Obligation bonds. A Muni is represented by the US General Obligation A Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured A General Obligation bonds. BBB Muni is represented by the US General Obligation BBB Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured BBB General Obligation bonds. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.
Exhibit 5: Taxable-Equivalent Muni Credit Curves
Taxable-Equivalent Muni Credit Curves
Source: Bloomberg, Western Asset. As of 20 Jun 25. Bloomberg Valuation Service (BVAL) Municipal Credit Indices (AAA, AA, A, BBB, respectively) and US Sovereign Curves. Taxable-Equivalent Muni Credit Curves consider the top marginal effective tax rate of 40.8%. AA Muni is represented by the US General Obligation AA Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured AA General Obligation bonds. A Muni is represented by the US General Obligation A Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured A General Obligation bonds. BBB Muni is represented by the US General Obligation BBB Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured BBB General Obligation bonds. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.
Exhibit 6: AAA Munis vs. Treasuries
AAA Munis vs. Treasuries
Source: Muni Yields: Thomson Reuters MMD, Treasury Yields: Bloomberg. As of 20 Jun 25. Past performance is not a guarantee of future results. It is not possible to invest directly in an index. Select the image to expand the view.
Exhibit 7: Tax-Exempt and Taxable Muni Valuations
Tax-Exempt and Taxable Muni Valuations
Source: Bloomberg, Western Asset. As of 20 Jun 25. Yield-to-worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. AAA, AA, A, BBB Corporate Indices; After-Tax Yield assumes a top effective tax rate of 40.8%. Taxable Muni Index Corporate comparable used is the Global Corporate Aggregate (ex. BBB) to better align credit quality and duration. Select the image to expand the view.

Western Asset Key Themes for Muni Investors

Theme #1: Municipal taxable-equivalent yields and income opportunities remain near decade-high levels.

Exhibit 8: Muni and Taxable-Equivalent Muni Yield-to-Worst
Muni and Taxable-Equivalent Muni Yield-to-Worst
Source: Bloomberg, Western Asset. As of 20 Jun 25. Bloomberg Municipal Bond Index yield considering highest marginal tax rate of 40.8%. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.

Theme #2: The AAA muni curve has steepened, offering better value in intermediate and longer maturities.

Exhibit 9: AAA Municipal vs. Treasury Yield Curves
AAA Municipal vs. Treasury Yield Curves
Source: Bloomberg, Western Asset. As of 20 Jun 25. Bloomberg Valuation Service (BVAL) AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.

Theme #3: Munis offer attractive after-tax yield compared to taxable alternatives.

Exhibit 10: Municipal vs. Taxable Fixed-Income Yields by Quality
Municipal vs. Taxable Fixed-Income Yields by Quality
Source: Western Asset, Bloomberg. As 20 Jun 25. 10- and 30-Year comparison reflects Bloomberg Valuation Service (BVAL) AAA Muni Curve and US On-/Off-the-Run Sovereign Curve. AA Muni reflects the Bloomberg AA Muni Bond Index. A Muni reflects the Bloomberg A Muni Bond Index. BBB Muni reflects the Bloomberg BBB Muni Bond Index. HY Muni reflects the Bloomberg High Yield Muni Bond Index. AA Corp reflects the Bloomberg AA Corporate Bond Index. A Corp reflects the Bloomberg A Corporate Bond Index. BBB Corp reflects the Bloomberg BBB Corporate Bond Index. After-tax yield considers the top marginal tax rate of 40.8%. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Select the image to expand the view.

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