In a year marked by volatility and political turmoil, municipal bonds have quietly defied the drama.

While headlines warned of spikes and slumps, the muni market has been more merry-go-round than rollercoaster so far in 2025.

Short-term rates have indeed had their ups and downs. Ten-year Treasury yields ended June about 30 basis points below where they started the year, while 10-year, AAA-rated municipal bond yields were up about 10 basis points at the halfway mark.

What’s notable for municipal bondholders is the long end of the muni curve, where yields climbed more than 50 basis points in the past six months, creating a prime opportunity for investors to secure highly attractive yields.

As Raymond James pointed out recently, elevated yields provide “great opportunity to ‘extend duration,’ and purchase longer dated bonds – with calls inside 10 years – and lock in an extra 30 to 70 basis points or more depending on the bonds selected.”

Exemption intact, ample muni supply

Indeed, it’s been an eventful six months.

Despite well-founded fears that Congress and the administration would eliminate the tax exemption on interest earned from municipal bonds, the massive tax and spending bill the president ultimately signed left it intact (“Senate Preserves Muni Exemption”).

A key driver of today’s yields? A surge in supply.

While issuance flagged in 2022 and 2023, new supply hit almost $500 billion last year. Through the first four months of this year, issuance has surpassed last year’s, which analysts have attributed to questions about the administration’s fiscal posture and concerns over whether the exemption would be changed.

“We believe supply may continue to be elevated in the coming months, but as the market receives more clarity around U.S. fiscal policy, issuance likely will revert back to more normalized level, which will remove this source of market pressure,” Lord Abbett said in a recent report.

17 quarters of upgrades over downgrades

Meanwhile, credit quality remains strong.

Moody’s has upgraded more municipal issuers than it has downgraded for 17 straight quarters – the longest such streak since 2008, according to Schwab.

“As a result of the streak of upgrades relative to downgrades, the percentage of munis that are either AAA/Aaa or AA/Aa, the top two rungs of credit quality, is near the highest in nearly two decades,” Schwab said.

Analysts don’t anticipate a significant decline in credit quality in the second half of the year, though “we would not be surprised if the pace of upgrades relative to downgrades slows,” Schwab reported.

While we can’t predict the future, the picture halfway through 2025 is encouraging.

As always, we urge investors, when funds are available, to seek quality then yield in their municipal bonds.

Amid today’s favorable conditions, investors can take advantage of a wide selection of high-quality municipal bonds, sleep soundly at night and continue to generate a reliable stream of tax-exempt income.