Municipal Fixed Income Monthly
Bounce Back: Munis Rebound in May
Market Overview: Non-Stop News Cycle
May was marked by a plethora of market-moving events that provided investors with a continual stream of topics to analyze. Tariffs were a primary concern again, as a 90-day suspension of retaliatory tariffs between the U.S. and China was announced. The Federal Open Market Committee (FOMC) decided to maintain the federal funds rate at its current level, while inflation data came in lower than anticipated. Moody's downgraded the sovereign rating of the US to Aa1, citing concerns over deficits. In legislative developments, the House passed the reconciliation bill, further intensifying worries about future deficits and increased Treasury borrowing. In the muni market, there was relief as the House Ways & Means Committee released its budget reconciliation bill, preserving the tax-exempt status of municipals. Overall, municipals rebounded strongly from a weak April and outperformed Treasuries due to positive inflows in addition to anticipated elevated levels of reinvestment capital during the summer.
Yields & Valuations
Muni yields were lower for shorter maturities but higher for longer maturities as the muni yield curve steepened by 20bps. The difference between 1yr and 30yr maturity munis at 174bps at month-end. Muni/UST ratios were lower across the yield curve as municipals outperformed. 2-5yr ratios fell 9-10 ratios, while longer maturity ratios were lower by 3-6 ratios. Muni/UST ratios ended May at 72/75/91% respectively for 5/10/30 years..
Source: Goldman Sachs Asset Management. Bloomberg. As of May 31, 2025.
Source: Goldman Sachs Asset Management. Bloomberg. As of May 31, 2025.
Muni Index Performance: Positive Returns
The Bloomberg Muni Index returned 0.06% in May, while the Bloomberg Muni High Yield Index returned 0.07%. Bonds with the shortest maturities exhibited the most favorable relative returns, whereas those with maturities of 20 years and longer underperformed. Within the investment grade rating categories, high-rated credits (AAA-AA) outperformed lower-rated credits (A-BBB).
Source: Goldman Sachs Asset Management. Bloomberg. As of May 31, 2025.
Credit Research Spotlight
Maryland: Moody’s downgraded to Aa1 due to economic under-performance and further pressure from federal policy changes and elevated fixed costs. Maryland’s rating had been Aaa since 1973 and has maintained their AAA from S&P since 1961.
District of Columbia: Moody’s downgraded to Aa1 due to the economic impact from federal policy changes, specifically the declining federal workforce that will impact the nation’s capital.
Endowment Tax: The current reconciliation bill would increase the tax rate on investment income for the largest endowments to a 21% max. This is expected to impact <50 universities and is not expected to be a major credit impact given the size and strength of these institutions.
New issue supply is on pace for a record-setting year. We expect the next few months to continue to be robust, but we may see a drop-off in activity as we hit the latter part of the summer. Demand will likely remain positive as re-investment capital peaks during the summer months and yields continue to be elevated.
Most maturities along the yield curve are on the wider end of their average valuation range versus recent history. Attractive absolute yields and stable credit fundamentals should support muni valuations tightening throughout the summer.
Boosted by healthy reserve balances, investment grade issuers remain on solid footing. This strong starting point may provide a needed cushion given a normalization in both revenues and federal aid. Credit spreads are fair after significant outperformance versus high grades and investors should be ready to opportunistically add risk.
Supply: Consistently Elevated with a Record Week Looming
May new issue supply amounted to $41 billion ($38 billion tax-exempt and $3 billion taxable). This was 3% lower than last year’s volumes but similar to last month’s. YTD, new issue volumes are up 10% versus last year. The increase in supply has been driven by issuance for new projects.
Weekly new issuance volumes in May ranged from $10 billion to $15 billion as even the holiday-shortened week saw robust volumes. As May was coming to an end, the market was bracing for the first week of June to have one of the largest new issue volume weeks on record.
Source: Goldman Sachs Asset Management. The Bond Buyer, Barclays. As of May 31, 2025
Demand: Positive Flows
May witnessed consistently positive inflows each week. This was a sharp turnaround from the activity that occurred in April where most weeks experienced outflows. On average, each week had $780 million of inflows based on weekly reporters data.
As has been the pattern for most of the year, long-term and high yield funds garnered the majority of the inflows. YTD inflows have totaled $5.9 billion, with most of those inflows having gone into ETFs.
Source: Goldman Sachs Asset Management. Refinitiv. May 31, 2025
Spreads: Slightly Wider, but Resilient
BBB spreads widened, or increased, by 3bps and ended the month at 96bps. While high yield muni spreads increased by 3bps to close at 181bps. The airline sector had the best relative returns for the month versus electric and hospital credits which underperformed. Shorter maturity securities outperformed longer maturity ones. In the face of market volatility and uncertainty, lower-rated municipal bond spreads have exhibited minor spread widening and have remained range bound.
Source: Goldman Sachs Asset Management, Bloomberg. May 31, 2025
