Focus on municipal bond fundamentals, not headlines

Municipal bonds are facing more policy noise in 2025, but the core market backdrop still looks resilient. Talk of changes to tax exemption and pressure on universities and hospitals has added uncertainty, yet a full loss of muni tax status appears unlikely because it would raise infrastructure borrowing costs.

At the same time, valuations have become more attractive after recent underperformance versus Treasuries, with yields now looking compelling on a tax-adjusted basis. Strong state and local balance sheets, along with large reserve buffers built since the pandemic, continue to support credit quality across much of the market.

The main risks are concentrated in sectors tied to Medicaid funding and higher education endowments, where policy shifts could weaken fundamentals for some issuers. Even so, improving technical conditions and seasonal demand may help stabilize returns as summer approaches.