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It could be a good second half of the year for municipal bond investors. The assets have continued to recover from the tariff-induced selloff in April which, in retrospect, was a buying opportunity, according to Bank of America. “We believe the opportunity to add duration exposure for munis is again presenting itself in the near term,” strategist Yingchen Li wrote in a June 6 note. “We also expect that this rally will likely continue for the rest of 2025.” The bonds are favored by wealthy investors since the income is free of federal tax, as well as state tax when the holder lives in the same state in which the bond is issued. Yields remain solid. For instance, the iShares National Muni Bond ETF currently has a 30-day SEC yield of 3.74%. Bond yields move inversely to prices. MUB YTD mountain iShares National Muni Bond ETF year to date Open window Tom Kozlik, head of public policy and municipal strategy at Hilltop Securities, said investors should take advantage of those attractive payouts. He warns that the opportunity isn’t going to stick around. “You don’t want to feel as though you have missed that window of opportunity … it is still open,” he said. “When it shuts, it could shut pretty quickly.” The pause on President Donald Trump’s reciprocal tariffs is scheduled to lift in early July . However, even after the deadline and if tariffs once again make headlines, Bank of America’s Li doesn’t anticipate the bond market will revisit peak yields, largely due to the changing economic outlook. The Institute for Supply Management’s ISM services index for May flirted with recessionary levels after a solid 12 months, he pointed out. “We regard slowing service data as a good driver for a likely better Treasury rates environment to come. As such, the muni market rally will get a much-needed boost,” Li wrote. “If the Treasury market were to take a bullish turn in a more sustainable way, we expect munis to follow in stride when ratios cheapen some. We believe such a time is around the corner; either it’s here already or near.” BlackRock is also bullish on munis. The bonds, which were modestly negative in May, significantly outperformed Treasurys that month, the firm said in a recent note. “We are constructive on the asset class for several reasons and view the current market environment as a buying opportunity, particularly as issuance remains elevated and provides ample ability to source bonds in the primary market,” wrote Patrick Haskell, head of BlackRock’s municipal bonds group. For one, macroeconomic uncertainty has set both absolute and relative valuations at attractive levels, he said. Plus, concerns over the tax exemption have eased since the House passed a budget reconciliation package that left them intact, he added. In addition, the supply-demand dynamics are expected to shift from net positive supply to net negative supply in the summer months, which has historically translated into strong seasonal performance, Haskell said. Selectivity is key Investors should be selective in this environment amid the normalization of credit, Kozlik said. That has come about as the Covid funding to local governments has been spent or mostly allocated, he added. “A lot of state – local governments are going to have to make sure that their ongoing revenues can pay for their ongoing expenses,” he explained. Still, while their credit quality may not be as strong as it was two years ago, there are a “decent number” of credits that are still very strong, Kozlik said. Meanwhile, BlackRock has an up-in-quality bias. The firm prefers essential service, airport , prepaid gas, housing bonds and select state and local government bonds. It suggests a barbell strategy with front-end exposure paired with the 20-year part of the yield curve. Bank of America also likes a barbell strategy. It is overweight A- and BBB-rated munis, as well as AMT bonds for those not subject to the alternative minimum tax.
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