Stocks & Bonds

A Historical Perspective

No, not bonds versus stocks – nor the long-standing Chicago bar. Stocks and bonds are complementary asset classes, not competing ones. In fact, traditional portfolio theory emphasizes combining them through asset allocation to balance risk and return.

In J.P. Morgan’s recent Guide to the Markets (always worth a read), they noted a diversified 60/40 portfolio delivered positive returns more frequently than an all-stock portfolio across every rolling time frame, from one day to 10 years.[1]

The data suggests that as the investment horizon gets longer, the role of bonds becomes increasingly more important. They help reduce volatility and increase the frequency of positive returns.

It’s not that bonds necessarily outperform stocks, but they serve as a consistent ballast to offset and complement stock returns. For us ephemeral and/or risk-averse beings, this consistency may be a critical facet as to why you allocate to fixed income.

The S&P has returned 15% per year over the last 4-years[2], and is currently near all-time highs. The Bloomberg Global Aggregate Index is up 1.50% per year during that same period. As we’ve mentioned in the past, bond returns have been dragged down by the 2020-2022 period of significant rate hikes and low starting yields. This was a double-edged sword for the past performance of bonds.

   
“A diversified 60/40 portfolio delivered positive returns more frequently than an all-stock portfolio across every rolling time frame, from one day to ten years.” — J.P. Morgan Asset Management, Guide to the Markets, Q2 2026
 

However, basing your future return assumptions on the past is like driving a car using the rearview mirror.

 

Looking Forward

Projected returns for stocks and bonds are quite dissimilar at the moment. Bond yields are back to 20-year highs, meaning their projected returns could be interpreted as being at 20-year highs – as yield is the main driver of fixed income returns.

However, due to the immense run in stocks and current elevated valuations, many stock forecasting models are not as optimistic on their outlook.

J.P. Morgan’s Guide to the Markets (as of 3/31/2026, when the S&P was trading significantly below current levels) noted the following stretch in equity valuations:

S&P 500 Valuation Metrics vs. 30-Year Averages (as of 3/31/2026)

Metric  Reading
Forward P/E vs. 30-Year Average 14.5% above
CAPE Ratio vs. 30-Year Average ~30% above
Dividend Yield vs. 30-Year Average 0.40% lower
 

Several respected frameworks currently project modest equity returns over the coming decade:

  • Nobel laureate Robert Shiller’s CAPE ratio model forecasts average annual total returns of just 1.3% over the next decade, including dividends. On a price-only basis, his model implies negative returns.[3]
  • A recent academic study incorporating earnings and revenue data argues the S&P 500’s expected return over the next decade is around 3% per year — below the current 10-year Treasury yield.[4]
  • Research Affiliates founder Rob Arnott forecasts roughly 3% annualized returns, citing a modest 1.2% dividend yield, earnings growth likely to slow to about half its recent pace, and a meaningful contraction in price-to-earnings multiples.[5]

Additionally, Arnott in a 2009 article “Bonds, Why Bother?” (Journal of Indexes, May-June 2009[6]) made the following points:

  • “Stocks have not outperformed bonds for the last 40 years” [note the 2009 article date]
  • An investor in 20-year Treasuries (consistently rolling to the nearest 20-year bond reinvesting income) outperformed the S&P 500 “starting any time we choose from 1979 through 2008.”
5.00%
30-Year Treasury Yield Near 25-Year Highs
3.90%
26-Year Average 30-Year Yield
6.34–7.14%
Muni Taxable Equiv. 37% Tax Bracket

On January 2nd, 1979 the 20-year Treasury yield stood at 9.00%.[7] Today, it yields roughly half of that, approximately 4.99%.[8] This matters because bond returns are mathematically anchored to their starting yield. So certainly, there is a shorter “runway” when compared to 1979’s yields.

But a shorter runway does not mean yields are unattractive. The 30-year treasury is near its highest level since 2000. It currently trades at 5.00%, meaningfully above its 26-year average of 3.90%. High-grade municipal yields range from 4% to 4.50% on the intermediate to long end, translating to taxable equivalent yields of 6.34%-7.14%.[9]  That taxable-equivalent figure represents approximately two-thirds of long-run equity returns, with substantially lower volatility and far shallower drawdown risk.

The basic principle here is straightforward: when yields are higher, forward-looking bond returns are higher. Today’s yields are not 1979, but they are the most attractive entry point in a generation.

 

Decades of Bond Outperformance

Arnott goes on to note that bonds outperformed stocks in the following time periods:

  • 1803-1871, 68 year span
  • 1929-1949, 20-year span
  • 1968-2009, 41-year span

The second and third periods are vulnerable to the charge of cherry-picking. Both are bookended by some of the worst financial crises in American history — the Great Depression defined the 1929–1949 window, while the 1968–2009 period closes on the Great Financial Crisis. It is reasonable to argue that selecting endpoints at or near market bottoms is a convenient way to make equities look worse than they are over the long run.

That criticism has merit, but only to a point. Even granting the endpoint selection, we are still talking about 20- and 41-year periods during which bonds outright outperformed stocks. A 41-year period of bond outperformance spans entire careers and investing lifetimes.

The standard belief is that equities outperform over a long enough time horizon, and the data broadly supports this. Over a forever spectrum, equities should outperform. However, none of us are forever. Most investors don’t have 50- or 70-year time horizons. They have finite working years, finite retirement savings, and a very real aversion to watching their portfolio fall 30 or 40 percent — even if temporary.

That is where bonds play a critical role. They step in to stabilize – and outperform at times – the rest of your portfolio.

 

Key Takeaways

This is not intended to fearmonger about the stock market, let alone predict we are in store for a period of bond outperformance. Instead, it serves as a reminder of a few key principles:

In Summary

  • – Recent bond underperformance was a historic anomaly. The low returns of 2020–2022 were driven by a unique rate environment, not a structural shift. Looking ahead, bonds are more likely to perform in line with the past 1–3 years (3–5%), given today’s higher starting yields.
  • – Higher yields mean higher expected returns. Starting yield remains the primary driver of forward-looking fixed income performance — and today’s yields are the most attractive in 20+ years.
  • – Diversified portfolios improve outcome consistency. A portfolio balanced between stocks and bonds significantly increases the probability of positive returns across any time horizon — particularly over longer periods.
  • – Bonds can outperform stocks over meaningful stretches. While equities likely lead over very long horizons, history shows extended periods where fixed income delivered superior results.
 

Thank you for your confidence in our team. Please reach out to your Investment Specialist or Portfolio Manager with any questions.

Matt Bernardi Sr. Vice President, Bernardi Securities

 
[1] J.P. Morgan Asset Management, Guide to the Markets, U.S. | 2Q 2026, as of March 31st, 2026. [2] Source: Bloomberg, May 4th, 2026 [3] https://www.fool.com/investing/2026/04/12/sp-500-in-10-years-nobel-laureate-robert-shiller/ [4] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5142047 [5] https://fortune.com/2026/03/17/spx-stock-market-future-returns-outlook-warning/ [6] As noted in Bonds: The Unbeaten Path to Secure Investment Growth by Hildy and Stan Richelson, page 16. [7] https://fred.stlouisfed.org/data/DGS20 [8] Bloomberg, May 5th, 2026. [9] Calculated at the 37% federal tax bracket

Muni Market Update – Blooming Spring Supply

March is an unpredictable time of the year in Chicagoland. A 70 degree day followed by hail and 30 degree temperatures. The fickle nature of weather this month has its literal green shoots, however, as daffodils and tulips start rearing their heads. The municipal market often moves in similar fashion at this time of the year, trading in fits and starts as it braces for the seasonal wave of supply that typically builds through late spring and into summer. In this environment, patience and selective investing are warranted. Investors should not fear accumulating cash at the moment, but be prepared to deploy it as more attractive opportunities emerge in the weeks and months ahead.

After a record year for issuance in 2025, supply in 2026 is trending along a similar trajectory and could exceed $600 billion. Many municipalities are still catching up on capital projects deferred during the COVID period, funding long-needed infrastructure investments across the country. The monthly trend when this supply is issued to market is predictably seasonal with nadirs in the January-February period, before increasing through March-May and peaking in June. We expect this pattern to repeat in 2026.  

Year-to-date issuance (orange line) is hugging – if not slightly surpassing – last year’s record supply (top end of grayed range). Source: Bloomberg

Below graphs the seasonality of supply. Notice the 3 and 5-year average (red and orange) starts increasing in late March through June. Source: Bloomberg

Barring any significant rally (lower yields) in treasuries, the coming increase in municipal supply should present investors with attractive opportunities to deploy cash. Even today, the long end of the municipal curve offers compelling nominal and relative value compared with other high-grade fixed income. Yields near 4% remain readily available in the ~15-year maturity range, which equates to a taxable-equivalent yield above 6.3% for investors in the 37% federal tax bracket. In contrast, short-to-intermediate maturities appear less compelling from both an absolute yield and relative value perspective.

The yield curve remains a tale of two cities: unattractive yields at the front end and more compelling valuations further out the curve. The latter may give investors pause given the duration risk inherent in longer maturities. Those concerns are understandable, particularly amid a recently weakening Treasury market, somewhat stubborn underlying inflation, and the recent spike higher in oil prices.

At the front end – with benchmark yields in the low to mid-2%s – we believe investors are best served by focusing on bonds with “funkier” structures, such as short calls and/or lower coupons. These structures can help capture yields of 3% or more (roughly 4.76% taxable-equivalent at the 37% bracket), providing a more attractive alternative to traditional short-maturity structures.

 

Our Approach Given Market Conditions

We continue to believe in the ladder portfolio structure as a diversified and disciplined way to invest in the municipal bond market. We are currently targeting yields of 3% at the front end of the yield curve and 3.75%-4.25% in the 15-20-year maturities. This said, we currently are adhering to more of a barbell approach by capturing attractive value on the long end but dragging our feet and gradually investing cash balances (front end of the barbell).

Given yields remain in the 3-4% range, returns over the medium term should follow suit, barring any major market moves. These yields correspond to 4.76%-6.34% taxable equivalent yields at the top tax bracket. These types of yields remain both outright and relatively attractive to other high grade fixed income. The upper end of the range (6.34% TEY) surpasses even BBB rated corporate bonds[1].  For high duration strategies, this is free lunch given municipals historically display significantly lower default rates (see addendum) and less sensitivity to weakening economic conditions. Furthermore, your average municipal bond offers solid call protection (8 to 10-years on average for new issues) and daily liquidity via public markets. Some of the alternative, private market fixed income products offer neither.

Given the attractive characteristics of today’s market—elevated long-term yields and the potential for even higher yields as seasonal supply builds—municipal bonds appear well positioned to offer compelling buying opportunities in the weeks and months ahead.

Thank you for the continued confidence you place in our team. As always, please do not hesitate to reach out to your Investment Specialist or Portfolio Manager with any questions.

 

Sincerely,

Matt Bernardi
Senior Vice President

 

Addendum: Highlight’s of Moody’s Default Rate History Report
Source: https://www.moodys.com/research/doc–PBM_1445155

This report, published in the summer of 2025, provides an in depth summary of the historical and current sturdiness[2] of the municipal bond market.

Moody’s notes:

  • There was one default – a small hospital system – in 2024 and most of the municipal sector remains highly rated and stable
  • Municipal defaults remain rare and concentrated in competitive enterprises.
  • Municipal ratings continued to drift up and at a higher rate than corporates
  • Median rating for municipal bonds is Aa3, compared with Baa3 for corporates.
  • As of the end of 2024, 98.5% of the municipal sector was rated investment grade

Historical default rates for Moody’s Aaa rated municipalities remains 0.00% while, and 0.02% for AA rated. For the latter, all the historical defaults ultimately had 100% recoveries, and most in short order.

We hope this serves as a reminder to the sturdiness of the asset class from a principal preservation perspective and appreciate Moody’s broad surveillance.

 

[1] Source: Bloomberg, USD US Corporate BBB+, BBB, BBB- BVAL Yield Curve; BVSC0075, March 12th, 2026

[2] As of 2024

Turning the Page on 2025

Happy New Year! Thank you for your continued confidence in our team of municipal bond specialists. As we close out another year, we are pleased about how we navigated the volatility of 2025 and remain focused on positioning client portfolios to capitalize on market opportunities ahead in 2026.

While much has changed over the past year, our approach to the stewardship of your assets has not. We remain deeply focused on this segment of the fixed income market and are committed to continuously enhancing our portfolio management, trading, and client service capabilities.

Over the past year, we have advanced several key initiatives:

  • Environmental Risk Index: Developed a proprietary index that integrates natural disaster probability overlayed with county-based financial resiliency. We plan to release a white paper on this index in the coming year.
  • Credit risk framework: An ongoing effort to strengthen both surveillance and forward-looking credit analysis. Through investments in technology and the development of internal systems, our credit team now covers a broader and more comprehensive segment of the municipal market than ever before.
  • Portfolio management infrastructure: Through continued investments in technology, we have improved processing speed, increased operational efficiency, and enhanced our ability to scale.
  • Firm Growth: Our team continues to expand with 26 total employees. Assets under advisement across the Bernardi Asset Management and Bernardi Securities platforms are now approaching $2 billion.

We look forward to further improvements in 2026!

 

2026: Will the Fed Pause and the Record Supply Streak Continue?

Municipal yields remain elevated by an uncertain path forward for Federal Reserve policy and heightened levels of supply issued by municipalities. The former is driven by uncertain inflation and employment dynamics, while the latter is underpinned by what will likely be a third year in a row of record supply levels. The combination of “top down” Fed policy uncertainty and “bottom-up” municipal supply dynamics should present many attractive opportunities for investors next year.

Municipalities across the country continue to fund new projects at record pace as both the need and cost of funding infrastructure has risen dramatically in the last five years. Generally, municipalities can afford this infrastructure buildout given high cash balances, stable underlying revenue streams, and a growing economic environment. Importantly, the “shadow liabilities” (i.e. pensions) of many have decreased significantly over the past five years, providing municipalities with increased capacity to issue debt responsibly.

Moody’s noted in a July 1st publication that US public pensions have exceeded their annual target returns three years in a row. And that overall net pension liabilities have declined for five straight years. The closing of the pension deficit during this period has been massive. Total net pension liabilities amount to $2.1 trillion today, down from over $6 trillion in 2020.[1]

A combination of heightened funding amounts, strong asset returns, and higher bond yields has allowed states and local governments to significantly reduce pension deficits. Most states and local governments continue to aggressively fund these liabilities, which will further alleviate underfunding levels. Stronger pension funding levels, paired with a stable macroeconomic backdrop, pave the way for heightened issuance to continue into 2026.

 

Fed & Yield Outlook – How We are Positioning from a Duration Standpoint

The Fed cut rates by 0.75% (three 0.25% cuts) during 2025. The 10-year treasury is priced at a yield of 4.13% today, down 44 basis points (0.44%) since the end of 2024. If the economy continues to show resilience and inflation stabilizes in the high-2% range, the Federal Reserve may wait for more definitive progress on inflation before implementing additional rate cuts. This could increase long term rates marginally higher.

At the moment, the market is expecting two more rate cuts with a 33% chance of a 3rd in December of 2026. The current Fed Funds Rate (FFR) is 3.75% (upper bound), so the market is essentially pricing in an end of year FFR of just over 3.00%. The FFR has averaged 2.10% since 2000 with a high of 6.50% (2000) and low of 0.25% (2008-2015, 2020-22). Consumer Price Inflation (CPI) is currently 2.70% (YoY) and has averaged 2.60% since 2000.

Given this context, by historical standards (at least since 2000), the FFR is high versus underlying inflation. The last time we were at such relative levels (FFR vs. CPI) was right before the dot-com bubble crash and before the Great Financial Crisis.  In fact, the FFR has been lower than underlying CPI for most of the time since 2000, and about 0.72% lower on average. Based on that average, a simple extrapolation to today’s inflation levels puts the Fed Fund’s Rate at 3% (in line with end of year market projections). Clearly, the Fed remains wary of the inflation embers reigniting, but there is certainly more room for cuts should inflation enter the mid-to-low 2% range.

From a client portfolio perspective, we welcome a patient Federal Reserve—one that keeps rates elevated long enough to avoid an economic downturn, but not so restrictive as to impair growth. Higher rates allow your portfolios to continue reinvesting at attractive yields, enhancing income, cash flow, and long-term total returns. Through the power of compounding, a sustained period of higher rates can be a meaningful tailwind for portfolio outcomes.

This dynamic of a historically high FFR relative to CPI gives us confidence to slightly overweight duration in portfolios. We aim to protect against interest rate risk through two mechanisms:

  1. a laddered portfolio structure and
  2. high allocation to high coupon bonds with attractive upside/downside profiles.

The former provides steady cash flow with a diverse maturity allocation. The latter provides heightened cash flows allowing quicker principal repayment (compared to lower coupon bonds) to redeploy at potentially higher prevailing market rates.

Ultimately, yield drives returns and longer duration strategies tend to outperform shorter duration strategies over time (up to a certain point). With a steep yield curve (longer term bonds yield more than shorter term), we believe now is a good time to slightly overweight duration. We’re targeting tax-exempt yields in the 3.50-4.00% range towards the middle-part and long end of a 15-year ladder. This equates to taxable equivalent rates of 5.55%-6.34% at the 37% bracket. We expect yields to remain in this territory for the time being, barring any material change in economic conditions.

This elevated duration approach worked for clients in 2025 and we expect will continue in 2026. With tax-exempt rates in the 3-4% range, now is the time to compound.

Thanks again for your confidence in our team and we wish you a happy and healthy 2026!

 

Sincerely,

 

Matt Bernardi
Sr. Vice President

[1] Moody’s Ratings, State and Local Government – US, Unfunded pension liabilities fall for a fifth year, down $4 trillion from 2020 peak; July 1, 2025

Muni Market Update: Spooky but Sustainable Supply

Now that it’s officially October—and finally a justifiable time to break out the Halloween decorations—municipal supply remains elevated and on pace to reach record annual levels. In 2024, issuance reached a record $460 billion, but this year is projected to far surpass it, with an estimated $580 billion in total issuance.[1] The market experienced intermittent indigestion with the high level of supply, but largely gained its footing over the past month. The Bloomberg Municipal Bond Index returned 2.26% – its best month since December 2023.[2] Furthermore, duration outperformed[3] as investors finally stepped in on the long end to capture high tax-exempt yields. As we head into the final quarter of this year, we see continued attractiveness in the intermediate portion of the yield curve (10-15 years), supported by favorable supply dynamics into year end. That said – should the economy hold in and inflation plateau – the treasury curve is pricing in a hefty number of cuts that may not materialize.  

 

SPOOKY SUPPLY

Municipalities are bringing debt to market at a breakneck pace in order to upgrade infrastructure and makeup for years of subdued issuance. Demand should continue to meet this supply backdrop, underpinned by a generally sturdy credit profile for the sector and a stable macro economy. Recent fund inflows demonstrate investors are starting to catch on. Strong returns naturally parallel high inflows and we’d expect demand to remain robust as ~4% tax-exempt yields are readily available in the intermediate portion of the yield curve. At the top federal bracket, this equates to a taxable equivalent yield over 6%, a spread over 200 basis points higher than the current 10-year treasury.

Supply is running approximately +15.5% higher year-over-year, a meaningful increase that has kept municipal-to-treasury ratios elevated throughout the year. Looking ahead, 2026 is expected to deliver another year of heavy issuance, though year-end seasonality remains favorable for the market. See below a graph of year-to-date issuance in orange compare to the five previous years. 

Source: Bloomberg

The American Society of Civil Engineers’ 2025 Report Card assigned U.S. infrastructure an overall grade of C, with scores ranging from B (ports) to D (stormwater and transit). Encouragingly, for the first time since 1998, no category was rated D−, and eight of eighteen categories improved. Still, the overall infrastructure deficit exceeds $2.9 trillion, underscoring the extent of deferred investment and the society’s conclusion that the “bill on our infrastructure systems was past due.”

Because municipalities are the primary source of infrastructure financing, it is unsurprising that issuance is at record levels. Assuming credit quality remains broadly intact, we expect robust supply to persist for years to come. Should ratios/yields remain at these current elevated levels, we expect investors to continue to recognize the relative value offered by municipals. This demand dynamic should continue to absorb heightened supply. Importantly, municipalities remain broadly well positioned fiscally, enabling them to raise debt to finance urgently needed infrastructure projects. Moody’s notes that the median rating for municipal issuers is Aa3, three notches below Aaa.[4]

THE FED’S PATH AHEAD

Further supporting returns this past month, was increased market confidence in Federal Reserve rate cuts following weak payroll numbers. Though inflation has plateaued in the high 2% to low 3% range (above the Fed’s 2% “target”), most agree the Fed Funds Rate (FFR) remains in restrictive territory at 4.25% (following a 0.25% cut on 9/17).

The gap between the FFR and CPI year-over-year (YoY) indicates the Fed is currently at its tightest stance since before the Great Financial Crisis (GFC). Concerns over tariff-driven inflation—and perhaps some lingering caution after the COVID-era spike—have kept policymakers from pursuing deeper rate cuts.

The chart[5] below plots this difference since 2007. The red gaps indicate a FFR above CPI YoY, while the green indicates the opposite. Red indicates restrictive monetary policy, while green stimulative. As you can see, the Fed has generally kept the FFR below the underlying rate of inflation since the GFC.

Source: Bloomberg

Interestingly enough, the Fed’s approach as of late is not entirely different from their pre GFC approach with a FFR consistently higher than the rate of inflation.

Source: Bloomberg

This restrictive dynamic, paired with weak employment data as of late, is in why the market is pricing in another four cuts (1.00%) through 2026. What actually transpires will depend on the trajectory of employment and inflation trends.

Another FFR cut (to 4%) at the end of October is highly likely. We’ll get another payroll and CPI print before then, though economists aren’t anticipating significant changes in either. Should both indicators hold in though the end of the year, the treasury market may slightly reduce its projections for further cuts, slightly pressuring bond prices and moving yields higher. Fed members recently projected the FFR to end at 3.40% at the end of 2026 while the market is pricing in more aggressive cuts to a 3% level. This is a bit of a disconnect between policymakers and the market.

In many ways, the bond rally since early summer has been stimulative in of itself and we may not need further aggressive Fed easing if the job market stabilizes. For example, the 30-year mortgage rate has moved from over 7.40% at the start of the year to 6.35% today.[6] Mortgage applications spiked 10% and 20% in the first two weeks of September.[7] Should this help stem some of the weakness experienced in the economy, and inflation continue to plateau, the market will need to reduce rate cut projections in 2026.

 

WHERE WE SEE VALUE

We remain modestly overweight duration relative to our positioning over the past 3–6 months. The municipal yield curve continues to appear steep compared to other high-grade fixed income sectors, supporting the case for medium-to-long-term outperformance. While ratios on bonds maturing inside of 10 years have cheapened recently, they remain less compelling than longer maturities. Should the Fed accelerate its rate-cutting cycle, the long end of the curve has meaningful room to rally. Conversely, if cuts fall short of market expectations, the combination of high tax-exempt yields, favorable ratios, and attractive end-of-year supply dynamics should still support municipals relative to other high-grade fixed income.

As always, we emphasize a laddered maturity structure to balance potential outcomes while ensuring consistent cash flows. At present, we are targeting ~3% tax-exempt yields at the front end and 4–4.50% further out the curve.

Source: Bloomberg, MMD, October 3rd, 2025

If you have any interest or questions about this process, please contact your Investment Specialist or Portfolio Manager.

 

Sincerely,

Matt Bernardi
Sr. Vice President

 

[1] Bank of American forecast; source Bloomberg

[2] Source: Bloomberg Municipal Bond Index Total Return, LMBITR Index, Bloomberg 9/30/2025

[3] For example, the Bloomberg 1-15 Year Municipal Index returned 1.45% during September compared to the Bloomberg Municipal Bond 7-year Index at 1.16%.

[4] Source: Moody’s Analytics – US Municipal Bond Default History and Recovery Rates, 1970-2023; October 24, 2024

[5] Source: Bloomberg; spready between the Fed Funds Effective Rate and CPI YoY since 9/30/2005

[6] Source: Bloomberg, Bankrate.com

[7] This was largely driven by refinancing applications, but stimulative, nonetheless.

Halftime Report – Muni Yield Dynamics & OBBB Passage

President Trump signed Bill Act H.R.1 on July 4th and with its passage, any current threat to the tax -exempt status of municipal bonds ceased. This was a threat we believed was unlikely to become reality, but with the capricious nature of today’s politics, never worth taking for granted.

As we noted in December of last year: “The benefits of tax-exemption cannot just be measured in dollars alone, and we expect its importance to be highlighted and preserved throughout the tax negotiation process.”

This is a significant ‘WIN’ for states, counties, cities, villages, school districts and hundreds of other local governmental units across the country.

Tax-exempt municipal bonds have financed low cost infrastructure projects in communities across our nation since the ratification of the Sixteenth Amendment to our Constitution in 1913.  The Revenue Act of 1913 established federal income tax and also included a provision exempting interest on state and local municipal bonds from federal taxation.  This provision was included by the 63rd United States Congress because it understood the critical role tax-exempt municipal bonds played in building a growing nation’s public infrastructure.

Sensibly and thankfully, the 119th United States Congress understands the vital nature of municipal bonds to every single congressional district and it left tax-exemption intact.

It’s a gratifying result after many months of intense discussions and lobbying by thousands of communities’ representatives, local government officials, and other market participants.

“Bravo” to everyone on a collective effort very well done.  Our communities will benefit from these efforts for many years to come. 

 

ATTRACTIVE MUNICIPAL BOND YIELDS

A surging new issue supply and the impressive absorption of it by investors has been a major story in the first six months of 2025. Issuance during the first half of the year was approximately $280 billion, an approximate 14% increase year-over-year.  The new year began with a robust new issue calendar, an unusual dynamic for the municipal bond market. And this dynamic persisted into mid-summer. California, New York, and Texas led the issuance parade.1  For the most part, impressive investor demand kept pace with this strong new issue supply.

Yields increased at certain points due to supply pressure, and yields are higher at the long-end of curve compared to the start of the year levels.  The table below of the “A” rated MMD Index2 illustrates the point:

DATE 5-Year 10-Year 20-Year 30-Year
01/02/2025 2.91% 3.17% 3.83% 4.12%
06/30/2025 2.72% 3.39% 4.51% 4.76%
Front running Fed rate cuts, strong demand from fund products in maturities <10-years, paired with high supply are contributing factors to this dynamic. It has resulted in a steep municipal yield curve and relatively cheap long-term ratios. As demonstrated by the chart below – longer term muni ratios (muni/treasury yield) have not kept pace with the rally in the 5 and 10-year part of the curve. A lower muni/treasury ratio means municipal yields are relatively lower than the corresponding treasury tenor.

Source: Bloomberg, July 9th, 2025


Bottom line: The best relative value continues to sit at long end of the yield curve where ratios range from 80%-100% of the corresponding treasury.  These are attractive absolute and relative levels in our view. A 4.50% non-taxable municipal bond yield approximates 7.14% taxable equivalent for a taxpayer in the 37% federal income tax bracket.

We expect the new issue supply to wane in July-August, as is customary, but remain above 5-year averages. We expect it to pick up post Labor Day and remain elevated the balance of the year before falling off post-Thanksgiving. Overall, 2025 new issuance levels will significantly surpass 2024 record supply levels.

We believe the continued robust supply and resulting elevated municipal bond yields allows investors to lock in attractive high yields in this sector.  Periodic market volatility and corresponding dislocations are likely to continue in the coming months. Investors should study both primary and secondary market sourcing for investments toggling between the two markets as values wax and wane in each.

 

CONTINUED OPPORTUNITIES FOR TAX LOSS HARVESTING

One of the features of a separate account portfolio, is the ability to surgically manage tax liabilities. In this case, you can pick and choose which bonds to sell/buy and how much in tax losses you would like to capture. Tax losses can be used to offset regular income up to $3,000 and carry forward to offset capital gains you may have elsewhere in your portfolio(s). This has been a popular portfolio strategy as of late and a way to both increase cash flow, restructure portfolio into higher coupons, and capture losses to benefit your end of year tax liability.

When we conduct our tax loss swap analysis we consider selling vs. buying yield, tax loss captured, payback period of the tax loss vs. increase in cash flow, portfolio structure and duration changes, among other metrics. If you have any interest or questions about this process, please contact your Investment Specialist or Portfolio Manager.

 

Thank you for your continued confidence in our team and allowing us to assist you in navigating today’s fixed income market.

 

Sincerely,

Ronald P. Bernardi
President & CEO

 

 

[1] Source: Bloomberg

[2] Source: Municipal Market Data, June 30th, 2025

Muni Market Update: Yield Spike

An illiquidity drought has swept through financial markets leading to spiking treasury and municipal yields. Yesterday’s announcement about a tariff pause may alleviate market conditions, but municipal yields are now at 14-year highs. The Bloomberg 10-year AAA rated benchmark ticked to 3.80% yesterday, which is over 6% taxable equivalent at the 37% bracket. The 10-year Treasury, for comparison, is 4.31%.

Historically, such market conditions are acute, short-lived, and offer great investment opportunities over the medium-to-long-term. A strength of the SMA (separately managed account) strategy we employ in client portfolios is it mostly avoids forced selling in this chaotic market unlike the fund/ETF universe. Massive selling activity – forced selling of fund and ETF investment vehicles – is in large part a cause of the irregular bond yields.

Alternatively, during the recent bond market turmoil we were actively bidding and buying yesterday and welcoming taxable equivalent yields of 5.00%-7.90% into investor portfolios. We believe such opportunities will remain for the coming days, but market conditions remain extremely volatile.

Please reach out to your Investment Specialist if you have any questions about your portfolio and current market conditions.

Muni Market Update: Elevated Yields and Ratios

A buyer’s market has emerged as tax-exempt yields hit an air pocket over the past couple of weeks, experiencing weak market conditions and, therefore, higher yields. The reason for the sell-off is due to a combination of fund outflows[1] – possibly related to tax season liquidity needs and portfolio rebalancing – and a backdrop of rising treasury rates. The average 10-year AA rated municipal[2] now yields 3.21%, up from below 3.00% at the beginning of March. Prices have moved down as they are inversely related to yields. This sell-off has occurred alongside treasuries, but to a greater extent. The 10-year treasury has moved to 4.23% from 4.10% in early March.[3] This sets munis up for their most attractive relative valuation since 2023 and we believe a great entry point for investors.

Yields are nominally attractive with 5% taxable equivalent yields[4] readily available for maturities under 10-years. Further out on the yield curve, tax-exempt yields of 3.80-4.25% are being priced in 11-17 year bonds. At the top bracket, this is equivalent to a range of 6.03%-6.74%. Furthermore, valuations compared to treasuries are compelling. This is demonstrated by the muni/treasury ratio. The higher the ratio, the higher the yield munis are relative to treasuries. This ratio now stands at 75%, nearing a 2-year high.[5]With elevated yields and ratios, we believe now is an excellent time to rebalance into munis. 5.00-7.00% taxable equivalent yields at the top bracket are readily available.

 

 

 

Chart Source: Bloomberg, March 31st, 2025

[1] According to LSEG Lipper Global Fund Flows, investors pulled $573mm from municipal-bond funds in the week ending Wednesday March 26th.
[2] Source: MMD
[3] Source: Bloomberg
[4] When calculated at the 37% federal tax bracket
[5] Source: Bloomberg BVAL AAA 10-year Municipal Yield

How to Mitigate Natural Disaster Risk in Your Muni Portfolio

Our thoughts and prayers go out to every individual and family impacted by the devastating fires in the Los Angeles area. Losing a house – let alone life – is unimaginable and the rehabilitation process beyond stressful for thousands of people.

 

Takeaways:

  • We expect municipal credit health to remain resilient in the Los Angeles area.
  • A yearslong period of uncertainly will ensue, but over time – due to a variety of fiscal levers and rebuilding efforts – the area will recover.
  • A Senate Budget Committee report correlates highly with FEMA’s National Natural Disaster Risk Index, with both playing a role in our internal credit analysis.
  • We believe a concentration to Midwest and Texas issuers helps i.) mitigate natural disaster risk while also ii.) maximizing after-tax yield compared to the benchmark.

 

The wildfires have spotlighted natural disaster risk present in municipal bond portfolios. However, over the past two decades from Katrina to Harvey, New York to California, municipal credit has remained durable and, in many cases – due to rebuilding efforts – emerged stronger than before.

S&P rated New Orleans BBB+ prior to Hurricane Katrina in 2005. 10-years later the city was upgraded to A- and now rests at an A+ rating.[1] Obviously there was a period of deep uncertainty immediately following the storm, but non-payment never occurred. The credit remained resilient following an extremely acute event where the city experienced upwards of a 30% decline of its population.

Los Angeles and its various municipal obligors – most prominently Los Angeles Department of Water & Power – are now in a time of uncertainty as the fire responsibility and resulting liabilities are being investigated. Our firm has overall low exposure to CA-based credits, and no exposure to the Department of Water & Power bonds, specifically. That said, we have confidence that a combination of state and federal assistance will mend the fiscal gap, while local revenues remain resilient given they are diversified and the area is still a desirable place to live and rebuild over time.

A plot of land in the Palisades neighborhood with remnants of a scorched home destroyed by the fire recently went up for sale for $1mm and received over 60 offers. The house was last valued at $2.7 million.[2]

Insurance will further dampen the financial impact of the disaster as individuals are able to partially recoup their loss and, hopefully, successfully rebuild their home and lives in the area. This said on a national scale, increasing insurance non-renewal rates could portend future credit weakness for certain areas of the country. A recent Senate Budget Committee report[3] flagged geographies experiencing an increase in insurance companies not renewing policies. The report was made possible from information from 23 insurance companies that compose 65% of the property insurance market from the years 2018-2023. In their request for information, the Senate committee noted a weakening insurance market and/or ballooning premiums in states like California, Louisiana, and Florida.

The states with the highest 2023 non-renewal rates are as follows:

State Non-Renewal % 2018 Non-Renewal % 2023 Change 2018-2023
FL 0.79 2.99 2.2
LA 0.49 1.80 1.31
NC 2.07 1.79 (0.28)
CA 0.94 1.72 0.77
MA 1.18 1.51 0.34

The report notes there is a clear correlation between non-renewal rates and natural disaster risk. Among the report’s other findings:

  • All 10 of the top 10 states ranked by insurance non-renewal rate were either coastal states…; [or] states with counties that experienced an average annual loss of $10 million or more from wildfire damage.
  • 82 of the top 100 counties — ranked by highest insurance non-renewal rates – were coastal or low-lying delta counties

Source: https://www.budget.senate.gov/imo/media/doc/next_to_fall_the_climate-driven_insurance_crisis_is_here__and_getting_worse.pdf

We also consider FEMA’s National Risk Index for Natural Hazards when surveilling individual credits. Naturally there is a high correlation between the Senate report and FEMA’s risk index.

Source: https://hazards.fema.gov/nri/

The data that hurricane and wildfire-prone geographies have experienced higher rates of non-renewal isn’t necessarily groundbreaking, but it caught our attention and we will be adjusting our internal credit analysis to take this data into account. [We are happy to discuss this in more detail should you have any questions.]

The insurance information is especially noteworthy as this partially represents a region’s financial resiliency following a natural disaster. It also indicates higher insurance premiums which may dampen the local economy in the immediate future.

From the Senate report: An analysis of the Committee’s non-renewal data and the previously public premiums data shows a clear positive correlation between higher premiums and higher non-renewal rates.[4]

Lastly, it may be a sign that an area is underinsured or not insured at all. This would hold back a recovery (and hence tax revenues) following a disaster.

 

How does this impact our approach to portfolio management and credit analysis?

Most prominently, it gives us further confidence to concentrate portfolios in the Midwest and assurance in Texas’s financial resiliency due to relatively moderate non-renewal rates. On the cautious front, issuers within certain areas of California and Florida will be ascribed higher natural disaster risk within our credit analysis. North Carolina – with its significant coastline – requires greater risk as well.

Source: Bloomberg Municipal Bond Indices

In the chart above, Bernardi Asset Management’s High Income and Tactical Ladder strategies maintain significantly higher allocations to Midwest-states and little-to-no exposure to FL, CA and NY-based credits. The benchmarks – therefore index funds – allocate over 30% to the latter three states, which are the largest issuers in the market along with TX.  

For non-coastal investors who do not benefit from double exempt[5] bonds (e.g. CA, NY, NJ, MA residents), this is a further reason to allocate away from the benchmark (which is heavily invested in those states) and capture issuers that pay higher yields, in large part because they are excluded from that benchmark. Even so, for coastal investors, a partial allocation away from the coasts is warranted even if the bonds don’t offer double tax-exemption.

Ultimately, there are virtually no states immune to natural disaster risk in our country whether it be a potential drought in Iowa or earthquake in California. But it behooves investors to allocate away from the more disaster-prone areas. In our opinion it may be a win-win with both higher yields and higher credit resiliency.

If you have any questions, please contact your Investment Specialist or Portfolio Manager.

 

Sincerely,

 

Matt Bernardi

Sr. Vice President

 

 

[1] Source: Bloomberg, S&P Global Ratings

[2] Source: Bloomberg

[3] Source: https://www.budget.senate.gov/imo/media/doc/next_to_fall_the_climate-driven_insurance_crisis_is_here__and_getting_worse.pdf

[4] https://www.budget.senate.gov/imo/media/doc/next_to_fall_the_climate-driven_insurance_crisis_is_here__and_getting_worse.pdf ; page 26

[5] Double tax-exempt meaning when a resident of a certain state purchases a bond issued by an in-state obligor. Oftentimes, these bonds are exempt from both state and federal income taxation. Certain states offer a high supply of these bonds such as CA, MA, NY, and NJ.

 

 

 

 

Disclosures: All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Past performance is no guarantee of future returns. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.

Late Year Yield Surge & 2025 Tax Reform

Happy holidays and Merry Christmas! We wish you a healthy and happy new year as we turn the page on 2024.

2024 ended as a subpar year for fixed income returns as coupon interest was offset by a late year surge in yields. The Bloomberg Municipal Bond Index[1] has returned 0.73% thus far year-to-date, after returning nearly 6.50% last year and averaging just below 3% since 2014. 2024’s flattish return is a reflection of the AAA rated 10-year municipal[2] moving from 2.26% at the beginning of the year to 3.14% today. It increased by 37 basis points in December, alone. Typically, a subpar year for bonds is followed by good performance the next year. In fact, since the Great Financial Crisis, the average return of the Bloomberg index is 8.45% following a sub 1% return in the prior year. This is in no way a prognostication for 2025, but portends well for future bond performance.

Chart Source: Bloomberg

The increase in yields this year is primarily a result of plateauing inflation, steady growth, and, therefore, the Federal Reserve is less willing to cut rates relative to prior expectations. Trump’s reelection is also cited as a factor causing weakness in bonds as of late, not dissimilar to his first election in 2016 when the 10-year treasury yield increased from 1.85% on election day to over 2.40% a month later. That post-election sell-off nearly wiped out all gains for the year, and munis finished up a paltry 0.25% in 2016. Bonds bounced back in 2017, recording a 5.45% gain, as long term bond yields ended the year slightly lower.[3]


The Fed’s Role in the Recent Selloff

Fed rate cuts are typically carried out in 0.25% (25 basis point) increments. At the last FOMC meeting the committee reduced its projection for rate cuts in 2025 from four (1.00%) to two (0.50%). It released this projection on the same day it cut the Fed Funds Rate to 4.50% from 4.75%. But because this cut was fully anticipated by the market and the pace of projected future cuts was not, rates increased during the trading day.

In fact, this has been the trend of yields since the first cut of the cycle on September 18th. Since then, the Fed has cut the short term Fed Funds rate by 100 basis points (1.00%) from 5.50% to 4.50%. During this time the longer-term 10-year treasury has moved higher to 4.55% from 3.70%.

This is an atypical relationship between the Fed Funds Rate and longer term rates at the beginning of rate cutting cycles. During the previous two cutting cycles (2019 and 2007), the 10-year was at a lower yield than where it started 100 days after the first cut.

Chart Source: Bloomberg

This unique divergence between the two rates is a historical anomaly and a result of inflation that has flatlined – and in some cases picked up pace – the last three months. PCE (the Fed’s preferred measure of inflation) printed at 2.40% year-over-year in November, which was up from 2.30% in October, but down from 2.70% the previous year. During the last cutting cycle (2019) inflation moved lower over the next three months following the first cut due to a slowing economy. Today’s level of inflation remains above the Fed’s 2% target which has raised the probability of less cuts than the market previously expected and has largely underpinned this yield surge as of late.

             

Tax Reform’s Risk to Ratios

The municipal market digested blockbuster supply in 2024 (nearly $500 billion) and is expected to face even more in 2025. The market was unphased by the increased supply. As we noted in our October commentary, muni/treasury ratios have remained stable through the end of the year as both investor demand and high coupon repayments vacuumed up supply. Though we would welcome higher ratios, greater than 5%-6% taxable equivalent yields[4] are readily available. This will keep ratios in check unless treasuries break into the 5% yield range or supply significantly surpasses last year.

On top of supply, congressional tax policy negotiations present headline risk to the market over the next year as key provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 are set to expire Dec. 31, 2025. A further decrease in the corporate rate would lessen bank demand for municipals, incrementally pushing ratios higher for bank qualified bonds. It remains to be seen where individual income brackets will settle, but we would expect them to remain unchanged at the 2017 levels, with 37% being the top bracket. Should there be a change, the risk is to the downside which would also incrementally pressure ratios higher given a lower benefit from tax-exemption.

During every tax reform cycle, the threat of removing tax-exemption reemerges. This has been measured by the CBO to “cost” the Federal government $30-40 billion per year. Historically, as negotiations pick up, Congressional representatives hear from local leaders – mayors, treasurers, city administrators, superintendents, police commissioners – about the importance of preserving tax exemption as both an efficient and highly effective way to stimulate investment into local infrastructure. Historically, this resonates, and tax-exemption is preserved and, in many cases, broadened to other types of projects. The benefits of the exemption to local districts is immeasurable and far outweighs any CBO estimate, which has false assumptions in of itself.[5]

Over $500 billion alone was raised by local towns and districts this year to fund infrastructure and the total market size is over $4 trillion. Without tax-exemption these figures would be significantly less or, if not, the tax burden on constituents would be significantly more (given higher taxable borrowing yields). For a country that already has a massive infrastructure deficit, this would put us even further behind.

What keeps tax-exempt yields relatively low for municipalities are the trillions of dollars individual investors keep invested in the market in order to secure principal and maximize after-tax income. The exemption has fostered a diverse capital market ecosystem composed of mutual funds, ETFs, separate accounts, electronic trading networks, broker-dealers, and advisors. These components enable the nexus that moves capital from investors seeking tax-exempt income to local projects that need low-cost financing.

Because projects are financed in a decentralized fashion by investors, the pricing mechanism is market-based and measured in yield. Yields are in large part derived by an obligor’s credit worthiness which is a measurement of how well they spend your tax dollars. Better management means lower yields, which means lower taxes and/or better local infrastructure and services for constituents. This aspect of the market keeps a lid on “bridges-to-nowhere” as dollars need to be paid for by the local population and local leaders’ reputation is on the line.

This decentralized, market-based feedback loop is enabled by tax-exemption with no federally centralized party dictating how or to whom capital should be allocated for local projects. The two most important inputs for if a project gets off the ground are need and ability to pay, rather than some sort of political connection or special interest group securing funds for a project.

Without tax-exemption, local taxes would be forced to increase, projects paired back, and the solicitation of funds from the central government greatly increased. With the latter, local control and, therefore, efficiency declines. Projects would be decided and financed less based on local input and fiscal judiciousness, and more on who has power in D.C. Not only is this a less efficient allocation of tax dollars but it also reduces community involvement, the bedrock of our federal republic.

If credit health is any indication of how well this market works, notice that 32 states are rated by Moody’s at Aa1 or better, which is equal to or better than the U.S. government! Only two states (Illinois and New Jersey) are rated below Aa3, demonstrating fiscal mismanagement is an infrequent bug, not a feature, in this market.

The benefits of tax-exemption cannot just be measured in dollars alone and we expect its importance to be highlighted and preserved throughout the tax negotiation process.

Thank you for your confidence in our team during 2024 and we look forward to working with you in 2025!

 

Sincerely,

 

Matt Bernardi

Sr. Vice President

 

 

[1] Source: Bloomberg (LMBITR Index) as of 12/30/2024; Bloomberg Municipal Bond Index Total Return; duration 6.33, Time to Mty: 13.57

[2] BVAL Muni AAA

[3] Source: Bloomberg

[4] Assuming a 37% bracket

[5] For example, the CBO estimates that every dollar invested in tax-exempt securities would be reallocated to taxable securities/strategies.

Disclosures: All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Past performance is no guarantee of future returns. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.

Muni Market Update: Fairly Valued with a Hefty Supply Backdrop

Municipal tax-exempt yields maintain fair overall valuations amidst a significant pick-up in supply throughout the year. The 10-year muni/treasury ratio is 69% vs. a 5-year average of 71%.[1] As of early September, total muni supply is up 38% year-over-year.[2] As we enter the final quarter, the pace of new supply should escalate further potentially pressuring ratios higher. Therefore, we think this fall could present opportunities to capture relative value in municipals should supply remain ample and the economy avoid a major slowdown. That said, investors remain awash in cash and any outsized move in municipal yields likely will be met with increased demand, bringing ratios back in check.

Source: SIFMA, September 2024

Greater supply is a welcome dynamic for a market which has essentially flatlined around $4 trillion total outstanding the past 15 years. This is during a timeframe where GDP has nearly doubled[3], money supply is up 250%[4], and treasury debt outstanding has moved from $8.8 trillion to over $27 trillion.[5] During this time, municipalities have generally not embarked on a debt-laden spending spree in effort to right size balance sheets post Great Financial Crisis. Furthermore, federal pandemic stimulus stuffed state coffers allowing some municipalities the ability to pay down debt. Entering 2024, rainy day fund balances are at record levels[6], pandemic aid is over, average pension funding is increasing, while our country has a pronounced infrastructure deficit…this means time is ripe for municipal issuance to pick up its pace for the foreseeable future.

This should pressure ratios (the yield of a muni relative to treasury) higher, providing higher relative yields which favors income oriented investors. Currently the 10-year muni/treasury ratio is 69%, near its average since 2021. Prior to the financial crisis, from 2000 to 2007 it averaged 86%.[7]

This means the average 10-year municipal had a higher yield relative to the 10-year treasury from 2000-2007 than it has since 2021. A variety of inputs effect this ratio including the supply of bonds, the Federal tax code, the perceived credit health of municipalities, and the resulting demand dynamics for municipal bonds themselves.

At this point in time, given a favorable macro backdrop (as the Fed cuts rates /disinflation continues) and sturdy demand from investors, any outsized move higher in ratios has been largely kept in check by investor demand. Demand has been underpinned by investors seeking high nominal and after-tax-adjusted yield, which remain available even as the market prices in over 200 basis points (2%) of rate cuts through 2026.[8] Looking further out, as baby boomers continue to roll into their retirement years – and likely increase their fixed income allocation – this may provide an offsetting demand dynamic to digest higher levels of supply.

Furthermore, money market fund balances just recently reached an all-time high at $6.76 trillion.[9] Investor appetite therefore is plentiful, and should ratios become overly disconnected, we’d expect a quick recovery as investors seek value.

 

The chart above displays YTD municipal bond issuance in orange, which has significantly outpaced the prior 5-years of issuance. As we enter the last quarter of the year, historical seasonality trends point to an increasing pace of supply. Source: Bloomberg, September 2024.

 

Current Yield

As the Fed cuts short term rates, we expect increased demand for intermediate-to-long duration bonds as cash moves off the sidelines away from deteriorating short term rates. The Fed currently is signaling an aim for a ~3% Fed Funds Rate (down from 5% today) to be reached over the next 2 years.[10]

Regardless of what the future might hold for supply and demand dynamics, we believe today’s relative and outright yield levels remain attractive for municipal bond investors. Tax-exempt yields of 3.00%-4.00% for a portfolio with a max maturity under 15-years are still attainable. At the top income tax bracket, these yields are equivalent to taxable rates of 4.76%-6.34%. Today’s 10-year treasury yields under 3.80% while it has averaged 3.25% since the year 2000.[11]

 

Sincerely,

Matt Bernardi
Sr. Vice President

 

[1] Source: Bloomberg BVAL AAA Muni Yield % of Treasury 10-Year. To calculate the ratio you divide the municipal yield by the concurrent treasury maturity yield.

[2] https://finance.yahoo.com/news/muni-debt-sales-set-surge-180737417.html

[3] Source: https://fred.stlouisfed.org/series/GDP

[4] Source: https://fred.stlouisfed.org/series/M2SL

[5] Source: SIFMA

[6] “With an estimated aggregate $155.7 billion in savings at the end of fiscal 2024, states could run government operations on rainy day funds alone for a median of 48.1 days, equal to 13.2% of spending—a record high. The strength of state rainy day funds remained approximately 66% greater than in fiscal 2019, just before the pandemic-induced recession started in February 2020.” Source The Pew Charitable Trusts, Prioritize Reserves as Fiscal Flexibility Declines, September 19, 2024 https://www.pewtrusts.org/en/research-and-analysis/articles/2024/09/19/states-prioritize-reserves-as-fiscal-flexibility-declines?rsrv_hbar_data_picker=rdfd&rsrv_line_data_picker=tbd

[7] Source: Bloomberg BVAL AAA Muni Yield % of Treasury 10-Year (MUNSMT10 Index)

[8] Source: Fed Fund Futures, Bloomberg WIRP screen

[9] Source: https://cranedata.com/archives/all-articles/10499/

[10] Source: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240918.pdf

[11] Source: Bloomberg, September 26, 2024

 

 

Disclosures: All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Past performance is no guarantee of future returns. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable.