UBS On-Air: Market Moves Top of the Morning: Muni Market - 2H25 Outlook: The better half
Jul 15, 2025
Sadiq Mukherjee, Fixed Income Strategist Americas at UBS and lead author of the Municipal Market Guide, shares insights on the municipal bond market's mid-year performance and its bright prospects for the second half of the year. He highlights the advantages of shorter duration and higher coupon bonds over struggling longer ones. The discussion also dives into the impacts of Medicaid cuts on rural healthcare and offers a positive outlook, recommending revenue bonds and exploring promising sectors for investment.
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First Half 2025 Muni Performance
- The first half of 2025 saw municipal bonds underperform other fixed income assets mainly due to rising yields and curve steepening.
- Longer durations and lower coupons underperformed while state government bonds did well, and credit quality had minimal impact.
Stronger Second Half Expected
- The second half of 2025 is expected to have stronger municipal bond performance driven mainly by coupon income.
- Despite elevated supply and potential technical weakness in fall, the demand-supply balance should improve compared to the first half.
Yield Attractiveness and Risks
- Municipal bond yields remain near 15-year highs, making tax-equivalent yields attractive, especially for longer maturities.
- However, risks such as treasury rate volatility and potential inflation increases advise a barbell strategy on the curve.