US municipal bond quarterly market recap and outlook

Third quarter 2025 recap

Municipal bonds delivered positive returns during the third quarter, as mixed performance in July and August gave way to strong gains in September. Investment grade, high yield, and taxable municipal bonds returned 2.87%, 1.58%, and 2.66%, respectively.¹ Higher quality municipal credits generally outperformed over the quarter.¹

Key takeaways:

• The municipal market generated positive returns during the third quarter, driven by a strong rally in September.
• Favorable market technicals supported the market’s advance, as the Federal Reserve (Fed) resumed its rate cutting cycle.
• Investment flows increased during the quarter, highlighted by robust demand for longer duration municipals.
• Supply remained elevated, significantly higher than in previous years, as issuers continued to come to the municipal market to borrow.
• State governments have improved their ability to service long-term pension liabilities, which has reduced the risk of major budget shocks.

Our outlook

The Fed cut interest rates in October and may do so again in December. With the new municipal issuance, we see opportunities in the municipal bond market due to high absolute yields and strong fundamentals. November and December are characterized by seasonal trends. Interest rates may also act as a catalyst for municipal performance. When interest rates fall, investors tend to move quickly into municipal bonds. If the Fed continues to cut rates, and history repeats itself, the increase in demand could add fuel to a potential rally in municipals late in the year.

Read the complete quarterly update.

Learn about our municipal bond funds.