With municipal yields sitting at elevated levels, advisors face the challenge of how to guide clients who remained underinvested through 2025 without falling into the temptation to wait for perfect clarity.
According to Ben Barber, director of the Municipal Bond Department at Franklin Templeton, the current setup itself argues against inaction.
“Municipal bonds continue to exhibit appealing yields compared to recent historical levels,” Barber told InvestmentNews, adding that “their relative underperformance against other fixed income sectors in 2025 has led to improved relative valuations,” two factors he believes advisors should weigh carefully when considering entry points for clients.
Together, Barber noted, yield levels and relative value help frame today’s opportunity set and reduce the risk of waiting too long for certainty that may never arrive.
Today’s rate volatility continues to influence how advisors allocate municipal bonds across taxable and tax-advantaged portfolios. Barber acknowledged that investor behavior is still shaped by recent history.
“2022 is still fresh in the minds of many investors,” he said, explaining that this experience “has led to a preference for short- and intermediate-term municipal bonds over the past few years.”
Looking ahead, Barber outlined two factors that could drive renewed interest in longer maturities. “A continued steepening of the municipal yield curve” and “a continued shift of investor expectations that interest rates will remain at their current level or move lower” could, in his view, encourage demand further out on the curve.
When it comes to demand dynamics, Barber continues to see pronounced strength in certain segments of the market.
“We continue to see insatiable demand for high quality short and intermediate-term municipal bonds,” he said, pointing to “strong flows to separately managed accounts,” as a key driver.
That demand, however, brings its own challenges. Barber cautioned that it “will result in an increased need for active management to navigate segments of the municipal market where valuations become rich,” underscoring the importance of selectivity as inflows persist.
Municipal issuance is expected to reach new highs, raising questions about whether supply will pressure performance or create opportunities to add exposure. Barber stressed that demand remains a critical counterbalance.
“Municipal supply is projected to reach a new high in 2026, yet there remains consistent demand for high-quality municipal bonds, particularly in maturities 15-years and shorter,” he said.
Looking forward, Barber emphasized the importance of monitoring shifts in investor behavior.
“It will be important to monitor whether investor preferences begin to shift toward longer maturity bonds,” he said, adding that “if investors seek higher yields, demand may increase for bonds further out on the yield curve.” Tracking these trends, Barber noted, can help advisors assess how supply-and-demand dynamics may influence performance and portfolio positioning throughout the year.
In an environment where yields are attractive, Barber warned that advisors may unintentionally underweight credit risk. “The two key risk factors for fixed income investing are interest rate risk and credit risk,” he said.
While interest rate risk has dominated investor attention since 2022, Barber suggested that this focus may create blind spots. “Interest rate risk has been top of mind for fixed income investors since 2022, so it is likely that credit risk may be overlooked by an investor at this stage of the cycle,” he said.
Barber emphasized that rigorous analysis remains essential. “We incorporate risk into every step of our investment process and rely on a deep and experienced research team to look closely at each credit that we invest in,” he added.
When asked which sectors or structures currently offer compelling risk-adjusted value, Barber highlighted the importance of individual security analysis over broad sector calls.
“We focus on evaluating individual bonds, so our sector mix will be a result of that bottom-up process,” he said. Bond structure, he added, remains highly dynamic and sensitive to market technicals. “That is a very dynamic topic that changes as the technicals in our market and the shape of the yield curve shifts.”
As an example, Barber pointed to “the large volume of prepaid gas deals in our market,” which he said “have created credit spread opportunities in the 5–10 year portion of the market that otherwise would not be present.”
For advisors managing client expectations, Barber outlined several metrics that can help determine whether municipal valuations are becoming more or less attractive.
“One valuation metric that investors can watch for municipal bonds is the municipal to treasury ratio,” he said, describing it as “a good gauge to monitor the relative attractiveness of municipal bonds on different segments of the yields curve.”
He also encouraged broader comparisons. “Another important metric is to look at taxable equivalent yield of munis vs. other fixed income asset classes,” Barber said, noting that this approach “can be especially applicable to investors who are looking beyond treasuries for a comparison.”
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