Municipal Bond Outlook for 2025
January 08, 2025
Read Time 4 MIN
The Federal Reserve’s (Fed) measured actions throughout the year are expected to sustain a trend of lower real interest rates. Headlines like "Blockbuster Good News for Inflation" suggest a favorable capital market environment for bond issuers. With issuers eager to secure funding for long-overdue public infrastructure projects, 2025 may well rival the record levels of bond issuance observed in the departing year 2024.
However, the federal tax exemption for municipal bonds remains an uncertain factor. If the incoming administration seeks to curtail or eliminate this exemption, we could witness a dual effect: a surge in new issuances aiming to lock in the current low cost of capital and a significant rise in valuations for the $4 trillion in outstanding bonds that would likely be grandfathered under such legislation. These developments are poised to drive strong performance in the municipal bond market.
Potential changes to individual or corporate tax rates will be a focal point of early policy debates under the new administration. Any reductions in tax rates could exert downward pressure on municipal bond prices and upward pressure on yields for outstanding issues. Nevertheless, such adjustments would further amplify the comparative advantage of municipals, particularly their high taxable-equivalent yields.
The accompanying chart illustrates municipal bonds' current taxable-equivalent yield advantage relative to other asset classes. As noted, prospective tax reforms would likely enhance this differential advantage, solidifying municipal bonds' position as a highly attractive option. Investors and advisors should prioritize this critical comparative element, elevating municipal bonds to the forefront of portfolio allocations in 2025.
Current Taxable-Equivalent Yield Comparison: Municipal Bonds vs. Fixed Income Asset Classes
Source: ICE Data Service as of 12/31/2024. For illustrative purposes only. Taxable-equivalent yield represents the yield a taxable bond must earn to match–after federal taxes–the yield available on a tax-exempt municipal bond (excluding AMT). Municipal bonds may be subject to state and local taxes and federal taxes on gains and may be subject to alternative minimum taxes. The chart displays the yield of the ICE Municipal Bond indices on a tax-equivalent yield basis. It compares such yield to other asset classes as represented by the indexes described at the end of this presentation. Fixed income investments have interest rate risk, which is the risk that bond prices generally fall as interest rates rise and vice versa. U.S. government bonds are guaranteed by the full faith and credit of the United States government. Municipal, corporate, agency, and mortgage-backed bonds are not guaranteed by the full faith and credit of the United States and carry the issuer's credit risk. Municipal bonds are exempt from federal taxes and often state and local taxes. U.S. Treasuries are exempt from state and local taxes but subject to federal taxes. Other securities listed are subject to federal, state, and local taxes. Prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions, and market liquidity. Prices of bonds change in response to factors such as interest rates and the issuer’s creditworthiness, among others. Investing in smaller companies involves risks not associated with investing in more established companies, such as business risk, stock price fluctuations, and illiquidity. Past performance is no guarantee of future results. The indices are unmanaged and are not securities in which an investment can be made. See index descriptions at the end of this presentation.
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We believe 2025 may present a unique convergence of market conditions, tax policy considerations, and investor opportunities that position municipal bonds as a standout asset class. With their compelling taxable-equivalent yields and potential for strong performance amid shifting economic dynamics, municipals are poised to be a cornerstone of successful investment strategies in the year ahead. Investors recognizing and acting on this opportunity will be well-positioned to capitalize on its benefits.
Choose Your Municipal Bond ETF
VanEck’s suite of municipal bond investing strategies offers investors flexibility to choose and fine tune their exposures:
VanEck Short Muni ETF (SMB): Investment grade bonds with maturities from 1 month to 6 years.
VanEck Intermediate Muni ETF (ITM): Investment grade bonds with maturities from 6 to 17 years.
VanEck Long Muni ETF (MLN): Investment grade bonds with maturities from 17 to 30 years.
VanEck Short High Yield Muni ETF (SHYD): Predominately high-yield bonds with maturities from 1 year to 12 years.
VanEck High Yield Muni ETF (HYD): Predominately high-yield bonds with maturities from 1 year to 30 years.
VanEck CEF Muni Income ETF (XMPT): Municipal bond closed-end funds with the potential for high income through many of the world’s top active asset managers.
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IMPORTANT DISCLOSURES
Index Definitions
ICE U.S High Yield Municipal Bond Index – A broad-based benchmark that measures the non- investment grade and non-rated, US dollar-denominated, fixed-rate tax exempt bond market. The index includes state and local general obligation, revenue, insured and pre-refunded bonds.
ICE U.S. Broad Municipal Index – Tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market.
ICE U.S. Treasury Core Bond Index – Index that evaluates the U.S. Treasury market. It's market value weighted and includes fixed rate securities that are denominated in U.S. dollars. The securities must have a minimum term to maturity of more than one year and less than or equal to thirty years.
ICE Long AMT-Free Broad National Municipal Index – Tracks the performance of long-maturity U.S. dollar-denominated investment grade tax-exempt debt publicly issued in the U.S. domestic market by U.S. states and territories as well as their political subdivisions.
ICE BofA AAA Municipal Securities Index – Subset of ICE BofA US Municipal Securities Index including all securities rated AAA. ICE BofA US Municipal Securities Index (U0A0) tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market.
ICE BofA U.S. Treasury Index – Tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the US government in its domestic market.
ICE BofA US Corporate Index – Tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued and settled in the US domestic market.
ICE BofA US Broad Market Index – Tracks the performance of U.S. dollar denominated investment grade debt publicly issued and settled in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
Definitions
Yield to Worst - Measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.
Duration to Worst - Measure of the duration of a bond computed using the bond's nearest call date or maturity, whichever comes first. This measure ignores future cash flow fluctuations due to embedded optionality.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.
An investment in the Funds may be subject to risks which include, among others, fund of funds risk, high portfolio turnover, model and data risks, management, operational, authorized participant concentration and absence of prior active market risks, trading issues, market, fund shares trading, premium/discount, general obligation bond, health care bond, water and sewer bond, special tax bond, transportation bond, private activity bond, sampling, index tracking, replication management, and liquidity of fund shares and non-diversified risks. The funds may be subject to following risks as a result of investing in Exchange Traded Products including municipal securities, performance of underlying funds’ investments, leverage, credit, high yield securities, tax, interest rate, call, state concentration and sector concentration risks. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that a Funds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax (AMT) rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. A portion of the dividends you receive may be subject to AMT. For a more complete description of these and other risks, please refer to each Fund's prospectus.
Taxable equivalent yields are used by investors to compare yields on taxable and tax-exempt securities after accounting for federal income taxes. TEY represents the yield a taxable bond investment would have to earn in order to match, after deducting federal income taxes, the yield available on a tax-exempt municipal bond investment. TEY = Tax-Free Municipal Bond Yield/(1 -Tax Rate).
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation
Related Funds
IMPORTANT DISCLOSURES
Index Definitions
ICE U.S High Yield Municipal Bond Index – A broad-based benchmark that measures the non- investment grade and non-rated, US dollar-denominated, fixed-rate tax exempt bond market. The index includes state and local general obligation, revenue, insured and pre-refunded bonds.
ICE U.S. Broad Municipal Index – Tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market.
ICE U.S. Treasury Core Bond Index – Index that evaluates the U.S. Treasury market. It's market value weighted and includes fixed rate securities that are denominated in U.S. dollars. The securities must have a minimum term to maturity of more than one year and less than or equal to thirty years.
ICE Long AMT-Free Broad National Municipal Index – Tracks the performance of long-maturity U.S. dollar-denominated investment grade tax-exempt debt publicly issued in the U.S. domestic market by U.S. states and territories as well as their political subdivisions.
ICE BofA AAA Municipal Securities Index – Subset of ICE BofA US Municipal Securities Index including all securities rated AAA. ICE BofA US Municipal Securities Index (U0A0) tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by US states and territories, and their political subdivisions, in the US domestic market.
ICE BofA U.S. Treasury Index – Tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the US government in its domestic market.
ICE BofA US Corporate Index – Tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued and settled in the US domestic market.
ICE BofA US Broad Market Index – Tracks the performance of U.S. dollar denominated investment grade debt publicly issued and settled in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
Definitions
Yield to Worst - Measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.
Duration to Worst - Measure of the duration of a bond computed using the bond's nearest call date or maturity, whichever comes first. This measure ignores future cash flow fluctuations due to embedded optionality.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.
An investment in the Funds may be subject to risks which include, among others, fund of funds risk, high portfolio turnover, model and data risks, management, operational, authorized participant concentration and absence of prior active market risks, trading issues, market, fund shares trading, premium/discount, general obligation bond, health care bond, water and sewer bond, special tax bond, transportation bond, private activity bond, sampling, index tracking, replication management, and liquidity of fund shares and non-diversified risks. The funds may be subject to following risks as a result of investing in Exchange Traded Products including municipal securities, performance of underlying funds’ investments, leverage, credit, high yield securities, tax, interest rate, call, state concentration and sector concentration risks. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that a Funds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax (AMT) rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. A portion of the dividends you receive may be subject to AMT. For a more complete description of these and other risks, please refer to each Fund's prospectus.
Taxable equivalent yields are used by investors to compare yields on taxable and tax-exempt securities after accounting for federal income taxes. TEY represents the yield a taxable bond investment would have to earn in order to match, after deducting federal income taxes, the yield available on a tax-exempt municipal bond investment. TEY = Tax-Free Municipal Bond Yield/(1 -Tax Rate).
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation