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MARKETS
January 16, 2026

Muni Monthly—December 2025

By Sam Weitzman, Christopher Johana, CFA
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Performance Overview

Munis posted below-average returns in December.

Municipal bonds posted positive returns in December, as reflected by the Bloomberg Municipal Bond Index’s total return of 0.09%. That is below the prior 10-year average December return of 0.57% as Treasury rates moved higher during the month amid an uptick in hawkish language from the Federal Reserve. Municipals outperformed Treasuries and corporate bonds, which returned -0.33% and -0.20%, respectively, amid improved technicals during the month.

Exhibit 1: December Total Return by Year
December Total Return by Year
Source: Bloomberg, Western Asset. As of 31 Dec 25. Select the image to expand the view.

Supply and Demand Technicals

The tax-exempt muni supply maintained an elevated pace, as observed throughout the year.

The month of December showed a strong supply and demand technical backdrop, which was a key contributor to municipals’ outperformance. New-issue volume remained robust and conclud-ed the record year of issuance. Total December new-issue volume reached $40 billion, down 12% from November levels, but up 25%from December 2024. Through 2025, municipalities issued a record $588 billion of new issuance, up from $500 billion during the prior record year.

From the demand perspective, investor flows accelerated into the end of the year. Lipper report-ed $5.9 billion of inflows into municipal funds, 60% higher compared to November’s $3.7 billion. Demand continued to concentrate in longer-maturity funds, with the long-term category attract-ing $3.0 billion of inflows.

Fundamentals

Improved credit trends were reflected in ratings activity in December.

Municipal credit fundamentals continued to show resilience despite slowing growth trends. Census-reported 2Q25 state and local tax collection estimates, which capture fiscal year-end results for most governments, showed 12-month trailing collections increased 4% year-over-year (YoY) to $2.1 trillion, a record high. Twelve-month trailing individual income tax collections rose 8% YoY, sales tax collections increased 2% YoY while corporate income tax collections were relatively flat. Rolling 12-month property tax collections, the primary revenue source for local governments, increased 2% YoY.

The improved credit trends were reflected in ratings activity. Public rating agency upgrades outpaced downgrades by more than 2 to 1, according to Bloomberg. Muni default activity also remained limited and largely isolated to select high-yield sectors and issuers. Through December 15, 2025, the muni market recorded 51 first-time payment defaults totaling $1.5 billion, down from 60 defaults totaling $2.1 billion in 2024, according to Bloomberg.

Exhibit 2: 2025 Muni Defaults by Sector (% Par Value)
2025 Muni Defaults by Sector (% Par Value)
Source: Bloomber. As of 15 Dec 25. Select the image to expand the view.

Valuations

Municipals generally offered higher after-tax yield advantages than at the start of the year.

Relative underperformance and record supply conditions improved the tax-efficient income op-portunities offered by munis entering 2026. The average investment-grade municipal yield, as measured by the Bloomberg Municipal Bond Index, ended the year just 14 bps lower at 3.60%. By comparison, yields on the Bloomberg Treasury Index and Bloomberg Corporate Index declined by 56 bps and 52 bps, respectively. Given the smaller magnitude of the municipal yield decline, after-tax relative valuations improved across most segments of the curve and credit structures over the year.

Exhibit 3: Muni vs. Taxable After-Tax Yield Pickup--YoY Change (bps)
Muni vs. Taxable After-Tax Yield Pickup--YoY Change (bps)
Source: Bloomberg, Western Asset. As of 02 Jan 26. Select the image to expand the view. 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 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.

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