If you’re wondering why municipal bond yields are so attractive, the answer might surprise you.
Generally, municipal yields track Treasuries. That is, when Treasury yields rise or fall, municipal bond yields usually move in tandem, keeping their yield ratio with Treasuries within a typical range. Recently, however, that relationship has become uncoupled.
Why?
Elevated new issue supply.
Record-breaking year
Last year, new issuance reached a record $508 billion – the first time it exceeded $500 billion – and could surpass that in 2025.
“The pace of new issuance picked up steam in the second quarter and remained on a record-breaking pace to start the year,” Goldman Sachs said in a recent report. “Municipal bond issuance in April and May were in-line with last year’s volumes. However, June’s volumes were 17% larger than June of 2024 and set a record for tax-exempt issuance for that month.”
Overall, the investment firm said, volume for the second quarter of 2025 was 14% higher than the same quarter in 2024 and 34% higher than the first quarter of this year.
Analysts expect this week’s issuance will be robust as well, at about $10.8 billion, though down from about $15 billion last week.
“This should provide investors with continued opportunity to invest redemption money or cash balances at attractive yields,” Raymond James said.
Attractive ratios
Key to understanding value is the municipal-to-Treasury ratio, which compares the yields of municipal bonds to Treasuries with similar maturities.
Historically, the muni-Treasury ratio has averaged about 65% to 85%. In other words, municipal bonds typically yield about 65% to 85% of what similar Treasury bonds yield. Because municipal bonds are exempt from federal income tax, they typically yield less than Treasuries of comparable maturities.
When the ratio climbs, as it has recently, it suggests municipals are unusually undervalued and offer compelling after-tax income.
Typically, Treasury yields would need to rise to push this ratio higher. But currently, it’s the surge in muni yields, driven by supply, that’s lifting the ratio (“Munis at the Half”).
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If value were a traffic signal, today’s ratio would be flashing green.
Yields soaring
Recently, 30-year, AAA-rated municipal bonds yielded 4.75%, or the taxable-equivalent yield of 8.02% for investors at the 40.8% tax rate. The muni-Treasury ratio for those bonds was a stratospheric 95%.
Even more astonishing, 30-year A-rated bonds were recently yielding 5.29%, or the taxable-equivalent yield of 8.93% for investors paying the 40.8% tax rate.
These are the most compelling muni yields in more than a generation.
Putting cash to work
As always, we recommend municipal bond investors focus first on quality, then yield. Fortunately, today’s market offers opportunity on both fronts.
With nearly $7 trillion of cash on the sidelines sitting in money-market funds, the case for moving off the bench and into high-quality bonds offering unusually strong yields has never been stronger.