Munis trail Treasuries by most since 2020 after issuance boom

The municipal-bond market is logging its worst performance relative to US government debt since the start of the pandemic, as a burst of new bond sales pressures prices.

State and local government debt has lost about 1% this year, trailing the 3% gain on US Treasury securities by roughly 4 percentage points, according to data compiled by Bloomberg.

That is the largest bout of underperformance over the same period since 2020, when financial markets were upended by the early days of the pandemic. After large swaths of the US economy shut down, investors were concerned about local-government credit quality. 

The lackluster performance is due to a mismatch in supply and demand. Municipal borrowing has surged with higher costs for construction and a depletion of federal-stimulus aid. Some deals were also accelerated to the first half of the year on worries over whether congressional lawmakers would roll back the tax break that underpins most municipal bonds. 

Local governments, school districts, colleges, hospitals and other borrowers in the $4 trillion muni market have sold more than $321 billion of long-term debt this year, a nearly 20% uptick from the same period in 2024. 

Heavy supply combined with elevated uncertainty around federal trade and tax policy “really weighed heavy on the market in the first half of the year,” said Joe Gotelli, head of municipal markets at American Century Investments. 

The municipal-bond market lost 2.5% in March and April when tariff-fueled trading caused intense volatility. While some of those loses have been pared back, elevated issuance kept the market from strongly rebounding. 

Vikram Rai, a portfolio manager at First New York, expects supply to remain elevated — reaching as high as $600 billion by the end of 2025. 

Long-term municipal-bond sales totaled almost $500 billion last year, according to data compiled by Bloomberg. 

“Performance is going to deteriorate even further,” Rai said in an interview. “The next few months will be a game of hot potato. There will be a lot of supply that will be on broker-dealer balance sheets and they will want to unload it onto buyers and the retail investor has to be careful.”

Yields on top-rated, 10-year benchmark muni bonds are hovering around 3.31%, about 20 basis points higher from where they began the year and 45 basis points more than the 2025 lows. 

“We have seen multiple months of that above-average supply and yields have had to rise a little bit for the market to absorb that,” said Tom Kozlik, head of public policy and municipal strategy at Hilltop Securities Inc. 

Those higher rates have created a buying opportunity for investors willing to take the risk, Kozlik said. The valuations were cheap enough to entice crossover buyers — investors who don’t traditionally buy municipal bonds — which may raise prices. 

“That window of investment opportunity will start to close for individual investors,” he said. 

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