Weekly Municipal Monitor—Swap Season

Blog

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

Municipals Posted Positive Returns Last Week

Munis rallied despite Treasury yields moving higher on hawkish Federal Reserve rhetoric. High-grade muni yields moved lower across the curve. Meanwhile, new-issue supply was elevated but net outflows from mutual funds slowed. The Bloomberg Municipal Index returned 0.80% during the week, the High Yield Muni Index returned 0.99% and the Taxable Muni Index returned -0.06%. This week we highlight recent record trading activity among muni investors driven by late-year tax-loss harvesting.

Muni Technicals Remain Challenged by Elevated Supply, Fund Outflows

Fund Flows: During the week ending November 8, weekly reporting municipal mutual funds recorded $151 million of net outflows, according to Lipper. Long-term funds recorded $150 million of inflows, high-yield funds recorded $190 million of inflows and intermediate funds recorded $81 million of outflows. This week’s outflows bring year-to-date (YTD) net outflows to an estimated $11 billion.

Supply: The muni market recorded $13 billion of new-issue volume last week, up nearly 3x from the prior week’s level. YTD issuance of $321 billion is down 1% year-over-year (YoY), with tax-exempt issuance 5% higher and taxable issuance down 38% YoY. This week’s calendar is expected to increase to $7 billion. Large transactions include $1.3 billion New Jersey Transportation Trust and $900 million Patriots Energy Group transactions.

This Week in Munis: Swap Season

Individuals often look to the end of the year to minimize tax liabilities by realizing portfolio losses to offset capital gains, referred to as “tax-loss harvesting.” Because of the diversification benefits of the municipal asset class, investors frequently look to their muni portfolios to execute these transactions. In addition to losses that can be realized to offset gains within or outside of their municipal portfolios, the practice also allows investors to purchase higher-yielding municipal bonds to increase tax-exempt income levels.

Western Asset attributes heightened municipal trading activity observed since October to tax-loss harvesting. According to the Municipal Securities Rulemaking Board (MSRB), muni trading activity reached record levels in October with 1.49 million trades, up 15% from the prior record in November 2022. In October 2023 and for the month to date, total items on Bloomberg’s daily municipal bids wanted list was 10,673, more than double the prior five-year average of 4,860.

This year’s relatively high level of tax swapping stems from a second consecutive year of negative returns in the municipal asset class. While municipals marked the lowest returns in over 40 years in 2022, equities also had significant negative returns, allowing for tax-loss harvesting opportunities across asset classes last year. Through September 30, the S&P 500 returned 13.06% YTD, while the Bloomberg Municipal Bond Index returned -1.38% YTD. This has led investors to look at their fixed-income allocations rather than at equity allocations for greater tax-loss harvesting activity.

Western Asset believes that the ability to tax-loss harvest a portfolio can contribute to favorable after-tax outcomes. However, it is important to consider that the municipal market is less liquid than other asset alternatives such as equities, government bonds and corporate bonds. Because of challenged market liquidity, particularly during periods of elevated selling, realized prices can quickly fall below what might be expected or implied by a price evaluation. It can be easy to take losses but more difficult to do so at fair market prices, and the ability to achieve adequate liquidity against tax-loss benefits should be scrutinized. Western Asset believes that partnering with a manager that can communicate market liquidity conditions and potential portfolio implications is important in successfully executing tax-loss harvesting strategies.

Explore Municipal Bond Yields and Index Returns

Explore Tax-Exempt and Taxable Muni Valuations

Western Asset Key Themes for Muni Investors

Theme #1: Municipal index yields and taxable equivalent yields are above decade highs.

Explore Muni and Taxable-Equivalent Muni Yield-to-Worst

Theme #2: The inverted yield curve offers opportunities in short and long maturities.

Explore AAA Municipal vs. Treasury Yield Curves

Theme #3: Munis offer attractive after-tax yield pickup vs. corporate credit.

Explore 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.