VanEck
January 09, 2025
Identifying trends that create impactful investment opportunities since 1955

Municipal Bond Outlook for 2025>

The Federal Reserve’s (Fed) measured actions throughout the year are expected to sustain a trend of lower real interest rates. Headlines like "Blockbuster Good News for Inflation" suggest a favorable capital market environment for bond issuers. With issuers eager to secure funding for long-overdue public infrastructure projects, 2025 may well rival the record levels of bond issuance observed in the departing year 2024.

However, the federal tax exemption for municipal bonds remains an uncertain factor. If the incoming administration seeks to curtail or eliminate this exemption, we could witness a dual effect: a surge in new issuances aiming to lock in the current low cost of capital and a significant rise in valuations for the $4 trillion in outstanding bonds that would likely be grandfathered under such legislation. These developments are poised to drive strong performance in the municipal bond market.

Potential changes to individual or corporate tax rates will be a focal point of early policy debates under the new administration. Any reductions in tax rates could exert downward pressure on municipal bond prices and upward pressure on yields for outstanding issues. Nevertheless, such adjustments would further amplify the comparative advantage of municipals, particularly their high taxable-equivalent yields.

The accompanying chart illustrates municipal bonds' current taxable-equivalent yield advantage relative to other asset classes. As noted, prospective tax reforms would likely enhance this differential advantage, solidifying municipal bonds' position as a highly attractive option. Investors and advisors should prioritize this critical comparative element, elevating municipal bonds to the forefront of portfolio allocations in 2025.

Current Taxable-Equivalent Yield Comparison: Municipal Bonds vs. Fixed Income Asset Classes

Source: ICE Data Service as of 12/31/2024. For illustrative purposes only. Taxable-equivalent yield represents the yield a taxable bond must earn to match–after federal taxes–the yield available on a tax-exempt municipal bond (excluding AMT). Municipal bonds may be subject to state and local taxes and federal taxes on gains and may be subject to alternative minimum taxes. The chart displays the yield of the ICE Municipal Bond indices on a tax-equivalent yield basis. It compares such yield to other asset classes as represented by the indexes described at the end of this presentation. Fixed income investments have interest rate risk, which is the risk that bond prices generally fall as interest rates rise and vice versa. U.S. government bonds are guaranteed by the full faith and credit of the United States government. Municipal, corporate, agency, and mortgage-backed bonds are not guaranteed by the full faith and credit of the United States and carry the issuer's credit risk. Municipal bonds are exempt from federal taxes and often state and local taxes. U.S. Treasuries are exempt from state and local taxes but subject to federal taxes. Other securities listed are subject to federal, state, and local taxes. Prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions, and market liquidity. Prices of bonds change in response to factors such as interest rates and the issuer’s creditworthiness, among others. Investing in smaller companies involves risks not associated with investing in more established companies, such as business risk, stock price fluctuations, and illiquidity. Past performance is no guarantee of future results. The indices are unmanaged and are not securities in which an investment can be made. See index descriptions at the end of this presentation.

We believe 2025 may present a unique convergence of market conditions, tax policy considerations, and investor opportunities that position municipal bonds as a standout asset class. With their compelling taxable-equivalent yields and potential for strong performance amid shifting economic dynamics, municipals are poised to be a cornerstone of successful investment strategies in the year ahead. Investors recognizing and acting on this opportunity will be well-positioned to capitalize on its benefits.

Choose Your Municipal Bond ETF

VanEck’s suite of municipal bond investing strategies offers investors flexibility to choose and fine tune their exposures:

VanEck Short Muni ETF (SMB) : Investment grade bonds with maturities from 1 month to 6 years.

VanEck Intermediate Muni ETF (ITM) : Investment grade bonds with maturities from 6 to 17 years.

VanEck Long Muni ETF (MLN) : Investment grade bonds with maturities from 17 to 30 years.

VanEck Short High Yield Muni ETF (SHYD) : Predominately high-yield bonds with maturities from 1 year to 12 years.

VanEck High Yield Muni ETF (HYD) : Predominately high-yield bonds with maturities from 1 year to 30 years.

VanEck CEF Muni Income ETF (XMPT) : Municipal bond closed-end funds with the potential for high income through many of the world’s top active asset managers.

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