This month’s Muni Monthly covers performance, supply and demand technicals, fundamentals and valuations for the month ending September 2025.
Performance Overview: Munis rallied in September.
In September, fixed-income market sentiment was bolstered by expectations that the Federal Reserve would continue to cut the fed funds rate. These expectations were reinforced by weak labor data early in the month, as August nonfarm payrolls increased by 22,000 jobs, down from the prior month and falling below expectations, along with weaker than anticipated inflation figures. After the Fed reduced interest rates at the end of the month, the positive sentiment partially abated as strong data emerged, including increasing home sales and upward revisions to GDP data. All told, Treasury yields moved lower during the month, and municipals outperformed amid improving demand conditions. The Bloomberg Muni Bond Index returned 2.32% during the month, leading year-to-date (YTD) returns higher to 2.64%.
Exhibit 1: Bloomberg Fixed-Income Index Return
Source: Bloomberg, Western Asset. As of 30 Sep 25.
Supply and Demand Technicals: Muni supply remains at a record pace this year.
Municipal supply maintained an elevated pace in September. Total new-issue volume reached $49 billion, which is in line with September 2024 and August 2025 supply levels. YTD municipal issuance totaled $437 billion, 15% higher than the prior record-year levels. The YTD tax-exempt supply of $401 billion is 15% higher year-over-year, while the taxable supply of $36 billion is 17% higher than prior year levels.
Municipal demand remained robust, particularly for longer-duration municipals, as the Fed cut rates. Municipal mutual funds recorded $5.5 billion of net inflows, according to Lipper. Long-term funds led muni categories at $3.5 billion of net inflows, followed by high-yield and intermediate categories at $2.2 billion and $1.2 billion, respectively.
Exhibit 2: Historical Municipal Supply
Source: ICI, Western Asset, Bloomberg. As of 30 Sep 25.
Fundamentals: Despite slower economic growth, state and local tax collections growth remains strong.
In September, the Census released 2Q25 state and local tax collection estimates, which coincided with the end of the fiscal year for most state and local governments. Second quarter major state and local government tax collections increased 5% from 2Q24 levels to $562 billion. The continued growth of state and local tax collections highlights the resilience of state and local revenues despite the lower economic growth trends observed earlier in the year. We expect a strong labor market and consumer spending to support tax collections and municipal credit conditions over the medium term. However, we expect the potential for tax collections to be more critical for budgets if federal spending reductions extend more broadly to state and local budgets.
Exhibit 3: 12-Month Trailing State and Local Revenue Collections
Source: Western Asset, Census NSA major state and local tax revenue. As of 30 Sep 25.
Valuations: The long end outperformed as the curve flattened.
As the Fed telegraphed a rate cut in September, the municipal bond yield curve significantly reversed the steepening observed earlier in the year. From September 1 to September 30, the AAA municipal yield curve 1-year yield rose 11 basis points (bps) to 2.30% while the 30-year yield fell 35 bps to 4.30%.
As a result of the curve flattening, longer maturities outperformed in September, with the Bloomberg Long Municipal Bond Index (22+ Year) returning 4.05%, retracing all the negative performance accumulated by the index this year. Meanwhile, the Bloomberg 1-Year Muni Bond Index significantly underperformed, returning just 0.08% during the month. The strong performance of longer-term munis is indicative of investors seeking higher income ahead of anticipated Fed rate cuts. Western Asset believes longer maturities continue to offer attractive relative value for long-term investors, considering elevated absolute muni yield levels and rolldown opportunities from the curve, which remains relatively steep versus taxable fixed-income markets.
Exhibit 4: September Municipal Index Performance by Maturity
Source: ICI, Western Asset, Bloomberg. As of 30 Sep 25.
Definitions:
“AAA” and “AA” (high credit quality) and “A” and “BBB” (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations (“BB,” “B,” “CCC,” etc.) are considered low credit quality, and are commonly referred to as “junk bonds.”
One basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).
The Bloomberg Municipal “Muni” Bond Index covers the USD denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
The Bloomberg Municipal High Yield Bond Index is an unmanaged index made up of bonds that are non-investment grade, unrated, or rated below Ba1 by Moody’s Investors Service with a remaining maturity of at least one year.
The Bloomberg Taxable Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term taxable bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies if all three rate the bond: Moody’s, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade.
The Bloomberg US Corporate Bond Index measures the performance of the investment-grade, fixed-rate, taxable corporate bond market. It includes U.S. dollar-denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg US Treasury Index measures the performance of US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with at least one year until final maturity. Treasuries, if held to maturity, offer a fixed rate of return and a fixed principal value; their interest payments and principal are guaranteed.
The Bloomberg Valuation Service (BVAL) provides prices on a daily basis for over 2.5 million securities across all asset classes.
The Bloomberg AAA BVAL Callable Municipal Credit Curve is represented by the US General Obligation AAA Muni BVAL Yield Curve. The BVAL curve is populated with pricing from uninsured AAA General Obligation bonds. The curve is populated with high quality US municipal bonds with an average rating of AAA from Moody’s and S&P. The yield curve is built using non-parametric fit of market data obtained from the Municipal Securities Rulemaking Board, new issues, and other proprietary contributed prices. The curve represents 5% couponing. The 3-month to 10-year points are bullet yields, and the 11-year to 30-year points are yields to worst for a 10-year call.
The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.
Inverted yield curve refers to a market condition when yields for longer-maturity bonds have yields which are lower than shorter-maturity issues.
Yield to worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.
Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.
U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
WF: 7097669
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