The municipal bond market experienced fluctuations in 2024, with tax-free yields rising in response to Treasury yield movements, particularly in the latter half of the year. Market uncertainty increased following the Federal Reserve’s December rate cut, which coincided with ongoing inflation concerns and economic crosscurrents. 

As 2025 begins, the potential extension of 2017 tax cuts under the new administration may impact demand for tax-free bonds, particularly if corporate tax rates are lowered. Climate-related risks, such as the LA fires and hurricanes, have drawn attention to municipal finance, with increased insurance costs and resilience measures potentially leading to more bond issuance. 

Despite these pressures, municipal credit quality remains stable, supported by strong reserves, prudent budget management, and infrastructure reinvestment. However, challenges persist in certain sectors, including healthcare, higher education, and public K-12 schools, due to shifting demographics, rising costs, and expiring pandemic aid.

Finsum: These are important things to monitor for municipal bonds, and the increasing role of DOGE, could drastically change this bond segment. 

Municipal bonds, often overlooked, are gaining attention as fixed income performs strongly, prompting investors to reconsider their portfolios for 2025. Gregory Steier from Brown Brothers Harriman, highlighted that with elevated yields and record municipal issuance, risks are relatively low, making this an exciting time for munis. 

Steier emphasized that, for 2025, high-quality municipal portfolios might even outperform equities. Munis are attractive for their liquidity, income, diversification, and tax efficiency, with national muni bonds offering advantages over state-specific ones. 

Investors can access municipal exposure through ETFs like the ALPS Intermediate Municipal Bond ETF (MNBD), which focuses on bonds exempt from federal taxes, offering an active approach and strong returns, outperforming its benchmark. 

Finsum: This strategy could be a compelling option for those seeking solid yields to kick off the new year.

Asset managers are increasingly rolling out tax-managed products, with investments in these vehicles seeing notable growth. Assets in tax-managed separately managed accounts (SMAs) surged to over $500 billion, a 67% increase within 18 months, while tax-managed mutual funds grew by 22% to $73 billion, according to Morningstar. 

Direct indexing dominates tax-managed SMA assets, offering customized tax management by investing in individual stocks within an index, though other strategies like ETF model portfolios and active equity are gaining traction. 

Morgan Stanley’s Parametric leads this area, managing $245 billion, mainly through direct indexing. Morningstar anticipates direct indexing will stay prevalent, but asset managers like JP Morgan’s 55ip and AB are exploring alternatives, focusing on model portfolios and municipal bonds for tax advantages. 

Finsum: We may see more unified managed accounts, which integrate various investment types, creating more comprehensive tax management options.