Weekly Municipal Monitor—Munis Play Catch-Up In October

Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Macros, Markets and Munis

Munis posted negative returns last week, but outperformed Treasuries. The Treasury curve sold off during the week, moving 6-8 bps higher across the curve. The high-grade muni curve also moved higher, but outperformed amid improving technical factors, rising 2-5 bps higher across the curve. Meanwhile, muni technicals were supported by slowing supply and steady demand. Amid the ongoing federal government shutdown that continues to limit data releases, the primary focus of the markets last week was on the Federal Reserve (Fed), which cut the fed funds rate by 25 bps while also announcing an end to quantitative tightening. Notably, there were two dissents within the Federal Open Market Committee, with one member advocating for a 50-bp cut and another advocating that rates remain unchanged, and Fed Chair Jerome Powell made hawkish comments emphasizing that a December cut was not a “foregone conclusion.” This week we touch on strong October muni performance.

Supply Increased to Near Record Levels While Demand Remained Positive

Fund Flows ($720 million of net inflows): During the week ending October 29, weekly reporting municipal mutual funds recorded $720 million of net inflows, according to Lipper. Long-term funds recorded $567 million of inflows, intermediate funds recorded $177 million of inflows and the short-term category recorded $36 million of outflows. Last week’s inflows led year-to-date (YTD) inflows higher to $37 billion.

Supply (YTD supply of $490 billion; up 15% YoY): The muni market recorded $8 billion of new-issue supply last week, down $10 billion from the prior week’s level. YTD new-issue supply of $490 billion is 15% higher than the prior year, with tax-exempt issuance up 16% year-over-year (YoY) and taxable issuance up 6% YoY. This week’s calendar is expected to pick back up to $11 billion. The largest deals include $2.6 billion Southeast Energy Gas Prepay (JP Morgan) and $561 million Sullivan County Resort Facilities transactions.

This Week in Munis: Munis Play Catch-Up In October

Heading into the month of October, municipals had significantly underperformed taxable fixed-income sectors in 2025. YTD through September 30, the Bloomberg Municipal Bond Index returned 2.64%, below half the return of the Bloomberg U.S. Treasury Index return of 5.36% and the Bloomberg US Corporate Index return of 6.88%. October’s Municipal Bond Index total return of 1.24% bucked the historically negative average October return since 1990, marked the highest October total return since 1990, and was nearly double the respective Treasury and Corporate Index returns of 0.62% and 0.38%, respectively. The strong monthly return brought the Muni Index YTD return to 3.91%, still lower than the 6.01% and 7.29% of the Treasury and Corporate Index returns, respectively (Exhibit 2).

Historical October Returns—Bloomberg Municipal Bond Index

October 2025 and YTD 2025 Returns—Bloomberg Municipal Bond Index

The favorable October performance this year reflects ongoing positive sentiment from individual investors seeking higher after-tax yields in the municipal market, particularly in longer-duration maturities, as the Fed\ continued its rate-cutting cycle. Lipper data shows municipal mutual funds recorded approximately $8 billion in net inflows during October, with the majority ($4.4 billion) directed to long-end category funds. This demand extended the long-end outperformance observed in September, with maturities beyond 10 years generally leading returns as the curve continued to flatten.

Despite the muni market narrowing the performance gap during the month, tax-exempt income levels remain near generational highs, and the relative YTD underperformance continues to offer potential demand catalysts, especially as the Fed is expected to continue its rate-cutting cycle into 2026. Sustained inflows, combined with the likelihood of seasonally lower supply heading into the holidays, support a constructive outlook for munis to gain further ground versus taxable counterparts. Western Asset believes investors are well positioned to capitalize on this year’s elevated supply-driven valuations, which may not persist at the same level through 2026.

Taxable-Equivalent Muni YTW vs. Corporate and Treasury Indices

Municipal Credit Curves and Relative Value

Western Asset Key Themes for Muni Investors

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

Muni and Taxable-Equivalent Muni Yield-to-Worst

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

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

Municipal vs. Taxable Fixed-Income Yields by Quality

© 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.

Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.

Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.

Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.

These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.

Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Ltda. is regulated by Comissão de Valores Mobiliários; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.