Muni Monthly—June 2025

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Performance Overview

Municipals posted positive returns as rates rallied in June.

In June, fixed-income markets responded positively to softer inflation and labor data, as global geopolitical tensions contributed to a flight-to-quality sentiment. Treasury yields declined by 16 to 18 basis points (bps) across the curve. Although municipal yields also fell alongside Treasuries, municipals continued to underperform other taxable fixed-income sectors due to record supply conditions. Shorter maturities and lower-investment-grade municipals generally delivered stronger performance during the month.

Supply and Demand Technicals

Muni supply remains at a record pace this year.

The municipal bond supply in June increased 23% from June 2024 levels, rising to $58.5 billion. This marks the highest monthly issuance so far this year and appears to continue at a record-setting pace. Year-to-date (YTD) municipal issuance totaled $283 billion for the first half of 2025, 18% higher than the prior record-year levels. Tax-exempt supply increased 17% year-over-year (YoY) to $257 billion YTD, or 91% of total issuance. Taxable municipal issuance totaled $25 billion, a 20% increase compared to last year.

Municipal demand continued to rebound in June following tax-related selling that occurred in the spring. Municipal mutual funds recorded $4.3 billion of inflows during the month, according to Lipper, with the largest inflows attributable to long-term ($3.6 billion) and short-term ($740 million) funds. These inflows led YTD inflows higher to $13 billion.

Fundamentals/Outlook

State and local tax collections remain near record levels.

In June, the Census released 1Q25 state and local tax collection estimates, which indicated continued revenue growth for state and local governments. Twelve-month trailing collections increased 5% to $2.1 trillion YoY, marking a record-high level. While strong revenue collections are indicative of credit resiliency in the muni market, the pace of credit rating improvement from the three major rating agencies has slowed so far this year. According to Bloomberg data, total entities upgraded (620) continued to exceed downgrades (472); however, total downgrades by par value of $122 billion outpaced upgrades of $112 billion. Meanwhile, first-time payment defaults totaled $1 billion, exceeding the 1H24 level of $711 million.

12-Month Trailing State and Local Revenue Collections

Valuations

For high taxpayers, municipals offer above-average after-tax relative value compared to taxable counterparts.

Record supply conditions and negative YTD muni performance has resulted in improved tax-exempt income opportunities and relative valuations. Longer duration and lower-investment-grade municipal credit offer above 100 bps of excess after-tax yield pickup versus like-structured Treasuries and corporate counterparts. We recognize that supply and demand imbalances, such as what we have observed this year, tend to correct. As a result, we expect that favorable relative value against the backdrop of strong credit fundamentals could establish the potential for attractive performance in the back half of the year.

View the Appendix for more information, including important performance and risk disclosures.

© Western Asset Management Company, LLC 2025. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").

Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.

These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.

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