Lind Capital Partners Municipal Market Commentary
Municipal Market Performance and Benchmark Rates: It was more of the same for the municipal market in December. Amidst US Treasury volatility, elevated municipal supply found a counterbalance in persistent demand, a dynamic that defined much of 2025. Despite a (hawkish) 25bps rate cut, inflation concerns coupled with stronger than expected economic and labor market data sent US Treasury yields higher in December, anywhere from 12bps to18bps, depending on tenor. Looking back year-to-date, 5 and 10-year UST rates are 60 and 38 bps lower, respectively, driven largely by FOMC interest rate policy. 30-year UST rates, which are less sensitive to Fed policy, finished the year 10bps higher, driven primarily by long-term fiscal concerns and pesky inflation data. Ultimately, the Bloomberg US Treasury Total Return Index (LUATTRUU) posted it’s best annual return since 2020, gaining +6.32% in 2025.
The municipal market outperformed in December, as the AAA Munciipal Benchmark was largely unchanged in 5 & 10 years, and 8bps higher in 30 years. While AAA municipal rates generally mirrored UST moves directionally, tax-exempts ultimately underperformed. AAA rates were 51 and 40bps lower in 5 and 10 years, but 31bps higher in 30 years for 2025. The Bloomberg Municipal Bond Index (IG) eked out +0.09% in December, finishing the year with 5-consecutive months of positive performance, ultimately returning +4.25% YTD. The Bloomberg Muni High Yield Index’s 4-month streak of positive perfomance came to an end in December, losing -0.24%, but ended the year in positive territory, returning +2.46% YTD.
Mutual Fund Flows: Municipal funds flows finished the year strongly, ending 2025 with 6-consective weeks (and 17 out of the last 20) of inflows. December inflows, which totaled close to $2B, were driven entirely by investment grade vehicles, as high yield funds saw outflows totaling over $300M. Persistent demand, demonstrated by institutional fund flows, has been a recurring theme in 2025. Total inflows year-to-date are expected to exceed $50B.
Notably, the majority of inflows in 2025 were driven by ETFs, which accounted for roughly 67% of total inflows. Municipal ETFs have experienced a surge in popularity over the last 15 years and now reportedly account for approximately 15% of the total municipal AUM (up from <1% 15 years ago and 2x over last 5-years). As LCP has highlighted previously, high-yield ETFs should be used tactically (short-term) rather than strategically (long-term) given the lack of credit due diligence on portfolio assets. While the proliferation of muncipal ETFs enhances municipal market accessibility broadly, which is welcome, the liquidity mismatch and amplified volatility, particularly in market turbulence, should be noted.
Primary Market Supply: Despite two holiday shortened weeks, December new issue supply exceeded $40B, a 20% increase YoY, and 30% higher than the trailing 5-year average for December. It was a record issuance year for the municipal market as total supply eclipsed $575B, a 17% increase YoY and 42% higher than the trailing 10-year average. Looking back, policy and tax uncertainty early in the year, increased infrastructure spending (and costs), and healthy borrower balance sheets (broadly speaking), drove the increase in supply in 2025. By many accounts, the record supply wasn’t “pulled forward,” but will instead continue in 2026 as strategists are predicting $600+ billion in issuance.
Lind Capital Partners Municipal Non-Rated Market Commentary
As we ring in the New Year, we take the opportunity to look back and compare actual market events to our expectations, as well as, look ahead to the coming year.
Looking back… We anticipated 3 market themes for 2025, the increasing cost of investor complacency, continued rate volatility and record levels of new issue supply. Generally, the three themes played out over the year, although not all for the reasons we anticipated. As expectations for Fed rate cutting increased, short-term rates, both taxable and tax-exempt fell. In the municipal market, short-term rates fell by 40 bps over the year, increasing the cost of maintaining cash positions. That said, it was not a steady decline to current rates, highlighting the volatility we anticipated. While the “Big Beautiful Bill” certainly had an impact on the municipal market from January until passage in July, it was President Trump’s tariff policy that affected markets and interest rates most dramatically. Announcement on “Liberation Day” early April of new tariffs led to a 70 bps rise in short-term rates before falling 300 bps when it was announced that implementation was delayed due to negotiations. Rates gyrated with news surrounding tariff policy throughout the year. Finally, we expected new issue volume to remain at a heightened level, reducing the backlog of infrastructure projects in the pipeline. Total new issue totaled roughly $575B, easily surpassing $500B in 2024. High rates and increased volatility kept borrowers on the sidelines for several years. One event we did not anticipate was the demise of the Easterly High Yield Municipal Fund which fell from $250MM AUM in January 2025 to $9MM today. The persistent daily withdrawal of investor funds, as highlighted in our August Note, led to a steady selling of liquid assets. As redemptions continued, the portfolio was down to highly illiquid and distressed assets. Further portfolio sales are at fire sale prices, led to a 50% drop in NAV.
While not credit related, the distressed selling led to depressed prices across a broad spectrum of the non-rated municipal market, from which the market is still recovering. We have used this as an opportunity to populate our portfolios with fundamentally solid credits at deeply discounted prices. We view the pricing impact as a short-term negative with significant long-term positive portfolio implications.
Looking Ahead… We expect rate volatility to persist given the uncertainty regarding future rate cuts and almost certain replacement of Fed Chair Jerome Powell in May. Rate volatility and the market uncertainty it creates typically results in mutual fund flow volatility. We welcome volatility in rates and fund flows as they create investment opportunities for long term investors, like ourselves. We do not anticipate new issue volume receding from current elevated levels, in fact, we would not be surprised to see another record in 2026. This should add to municipal market volatility and result in additional investment opportunities.
Another trend we expect to continue is the increased role of ETFs within the municipal universe. ETFs have increasingly garnered positive fund flows as well as, straight conversions from traditional open-end funds. As discussed above, we have always thought ETFs should be viewed as as strategic vs. long-term investments, given the lack of credit due diligence and ongoing surveillance. This is particularly true within the high yield market. The creation and redemption process for ETF shares often results in extraordinary market opportunities. In our opinion, they are not well suited for non-rated municipal assets.
We look forward to the coming year and expect to be surprised by the unexpected. We do believe there will be a high-profile credit default or two (September Note) but will not be representative of broad market stress. It will likely add to market volatility. The non-rated market should continue to revert towards “normalcy” as price discovery continues. A range-bound market should provide ample opportunity to continue populating our portfolios with tax-exempt yields +/- 6.50%, which should result in a very happy new year.
The chart above shows the increase in value of $1,000,000 invested in the LCP composite at inception (net of management fees and expenses) vs. the benchmark, the Bloomberg High Yield Muni (LMHYTR) as well as the Bloomberg Muni (LMBITR) indices (it is not possible to invest in either Bloomberg Index). Please contact us with questions regarding credit profile, returns, taxable equivalent yields or further portfolio information. Past performance is not indicative of future results.
Lind Capital Partners Municipal Market Charts
