Now is the time to nab solid yields in these tax-free bonds. Here's why

Municipal bonds are anticipated to rally through 2025, with Bank of America and BlackRock signaling a significant buying opportunity for investors. Both firms highlight attractive valuations stemming from macroeconomic uncertainty, easing tax exemption concerns, and an expected shift to net negative supply dynamics, with Bank of America's Yingchen Li also pointing to slowing service data as a catalyst for a favorable Treasury environment. While the tax-exempt income remains appealing, experts like Hilltop Securities' Tom Kozlik caution that this window of opportunity may close quickly, urging selectivity due to normalizing credit quality post-COVID funding, with BlackRock and Bank of America recommending an "up-in-quality" bias and barbell strategies.

Analysis

A strong consensus is forming among major financial institutions, including Bank of America and BlackRock, that the municipal bond market presents a significant buying opportunity with a rally anticipated through the rest of 2025. This positive outlook is driven by several factors: valuations are viewed as attractive following the April tariff-induced selloff, macroeconomic uncertainty is supporting bond markets, and concerns over the federal tax exemption for muni income have subsided. Bank of America strategist Yingchen Li highlights slowing U.S. economic data, specifically the May ISM services index, as a key catalyst for a more favorable Treasury rate environment that would provide a tailwind for munis. Furthermore, BlackRock notes a favorable seasonal dynamic, with an expected shift to net negative supply in the summer months historically correlating with strong performance. While yields are solid, as exemplified by the iShares National Muni Bond ETF's (MUB) 3.74% 30-day SEC yield, Hilltop Securities cautions that this window of opportunity could close quickly. Credit selectivity is now paramount, as the normalization of municipal credit quality is underway with the depletion of COVID-era funding. In response, analysts advocate for an up-in-quality bias and barbell strategies, with BlackRock preferring essential service and infrastructure bonds, while Bank of America is overweight A- and BBB-rated munis.

Key Decisions for Investors

• Investors should consider the current environment a strategic buying opportunity to add duration exposure to municipal bonds, but act with urgency as the window of attractive valuations may be short-lived.
• Prioritize credit selectivity due to the normalization of municipal finances post-COVID funding; an up-in-quality bias toward essential service revenue bonds or a focus on specific A- and BBB-rated issuers is advisable.
• A barbell strategy, combining front-end exposure with positions on the 20-year part of the yield curve, is recommended by multiple analysts to effectively manage duration risk while capturing income.
• Closely monitor key economic indicators, such as the ISM services index, and Treasury market movements, as these are identified as the primary catalysts for the anticipated muni bond rally.