muni bonds

• The municipal bond market is enjoying its third consecutive year of meaningfully positive total return, 12% on a cumulative basis, since 2023. CIM’s strategies have delivered meaningfully higher returns both net-of-fees and after taxes.
• Municipal bond total returns for the combined period of September through October 2025 were the highest in over 30 years.
• Long duration municipal bonds have outperformed short duration munis by roughly +6.00%, or +600 basis points, since September 1^st.
• Municipal bond TEY’s now exceed nearly every other fixed-income asset class, according to Morgan Stanley Research.
• Consistent with our expectations, moderate inflation and weakening labor market conditions have driven the Fed to restart its easing cycle, cutting interest rates twice with more cuts expected in the near-term.
• Our strategies offer yields between 6% and 7%, on a TEY basis for those in the highest tax bracket, thereby meaningfully compensating investors to swap out of low yield, low return short duration cash and passive bond strategies.
• High-net-worth investors with exposure to Treasury bond ladders would also benefit from transitioning to municipal bonds, given the meaningful yield decline we have seen in short-term Treasury bonds and the higher taxable equivalent yields municipal bonds offer.
• We remain constructive on the outlook for the municipal bond market through the end of 2025 and into 2026.

As we approach the close of the fourth quarter and the Thanksgiving holiday, this time of year presents an opportunity to reflect on events of the past several months and the impact of our decisions on achieving our individual and collective long-term goals and objectives. CIM would also like to express our sincerest gratitude to the clients and advisors we serve for their ongoing trust, confidence, and loyalty. We take our role as responsible stewards of our client’s wealth extremely seriously. For this reason, we are deeply grateful for the value we have delivered throughout 2025, despite yet another tumultuous period in the financial markets. As we evaluate events of this past year, we also carefully consider the risks that lie before us.

While the year is not yet over, it may come as surprise to some that the municipal bond market is enjoying its third consecutive year of meaningfully positive total return, 12% on a cumulative basis, since 2023, according to the Bloomberg Municipal Bond Index. CIM’s strategies have delivered meaningfully higher returns both net-of-fees and after taxes.  For example, our Municipal Credit Opportunities and Municipal Market Duration strategies have delivered over +17% and +15% respectively, net-of-fees on a cumulative basis, over the aforementioned period. This was not the case just a few months ago, as the first seven months of the year were decidedly weak for the municipal bond market. This caused some short-term investors in the muni market to become disenchanted with returns they had achieved. Some were even motivated to liquidate the entirety of their municipal holdings, selling longer-term bonds to invest in short duration paper or cash. Unfortunately, for those investors, this rash decision was ill-timed as they missed out on one of the strongest rallies in the history of the municipal bond market at end of the third quarter. For example, long duration municipal bonds have outperformed short duration munis by roughly +6.00%, or +600 basis points, since September 1st, 2025, according to Barclays Municipal Research.  Municipal bond total returns for the combined period of September through October 2025 were the highest in over 30 years.  The surge in municipal bond prices over the past several weeks has transformed an otherwise lackluster year of returns into a decidedly solid year for the muni market and our strategies in particular.

There is significantly more room for longer duration munis to run, in our view. This is partly due to the relatively high yields one can still achieve in municipal bonds that are exempt from Federal and, in many instances, state income taxes. This tax-exemption is powerful, as a tax-free return of 4.00% translates to a taxable equivalent yield (TEY)* of +6.80% annually, for those in the highest federal tax-bracket. When we consider the substantially lower risk that municipal bonds carry, the diversifying force municipal bonds provide in one’s asset allocation becomes apparent.  Municipal bond TEY’s now exceed nearly every other fixed-income asset class, according to Morgan Stanley Research, see Figure 1 below.

We deeply appreciate our clients’ patience and conviction in the fundamental macroeconomic view we shared many months ago. We know the first half of the year was a challenging period for many investors. This experience is yet another reminder that a patient, measured, and calm approach to investing and assessing one’s return experience is essential, given the degree of short-term volatility the exists in markets today. Our disciplined approach to portfolio construction and positioning is reflected in our long-held views on the direction of the US economy and expressed in our portfolios, enabling our clients to participate fully in the municipal bond market rally of the past two months.

Consistent with our expectations, moderate inflation and weakening labor market conditions have driven the Fed to restart its easing cycle, cutting interest rates twice with more cuts expected in the near-term. For this reason, we believe investors who remain largely underweight fixed income, and municipal bonds in particular, should consider increasing their municipal bond holdings to lock in higher yields before rates fall further. Most savings rates and money market funds have now fallen well below the important 4.00% taxable yield threshold. Our strategies offer yields between 6% and 7%, on a TEY basis for those in the highest tax bracket, thereby meaningfully compensating investors to swap out of low yield, low return short duration cash and passive bond strategies. High-net-worth investors with exposure to Treasury bond ladders would also benefit from transitioning to municipal bonds, given the meaningful yield decline we have seen in short-term Treasury bonds and the higher taxable equivalent yields municipal bonds offer.

As investors consider the most appropriate asset allocations to help navigate rising uncertainty, driven by extreme valuations on risk assets, we understand some investors may compare the returns of the high-flying S&P 500 to the returns municipal bonds have delivered over the past few years. We would caution against this comparison. The highly volatile S&P 500 is demonstrably different than high quality, stable, and durable municipal bonds. As such, munis should not be expected to deliver a similar return experience. The S&P 500 carries dramatically higher risk, roughly 400% more risk, as measured by the S&P 500’s ten-year standard deviation of return of approximately 16%. On the contrary, municipal bonds play a vastly different role in an investor’s asset allocation. Municipal bonds, by definition, offer investors stable cash flow and safety of principal, providing consistent competitive tax-free cash flow while also preserving the wealth investors have accumulated through hard work and discipline, often across generations.

What lies ahead?

We have good news to share. We expect municipal bond fundamental credit quality to remain stable going forward. Moreover, CIM’s demonstrated ability to identify and select stable-to-improving issuers, as illustrated by our long-term track record of success, provides confidence to investors seeking to successfully leverage the opportunity to moderately move down in credit quality to meaningfully increase yield, without materially amplifying credit risk. We know with certainty that we don’t know what lies ahead. Market conditions and public policy shifts serve as stark reminders that risk persists regardless of how much some in the investing community would like us to ignore it. For this reason, we believe investors will continue to seek out lower risk, higher yielding instruments. Therefore, we remain constructive on the outlook for the municipal bond market through the end of 2025 and into 2026. Technical market conditions that existed during the first half of the year have begun to dissipate, as evidenced by the outperformance of the municipal bond market in recent months.  As we approach year-end, the expected decline in new issuance and elevated yields investors can still achieve on longer duration municipal bonds will likely continue to attract investor inflows supporting municipal bond performance in the months ahead.

Should you have any questions regarding the municipal bond market or this commentary, please do not hesitate to reach out.

Sincerely,

Andrew Clinton

CEO

• The recent Bureau of Labor Statistics (BLS) payroll revision showing downward revisions of a record 911,000 jobs in the year through March 2025, further demonstrates the weakness of the current job market.
• The Consumer Price Index (CPI) peaked at 9.1% in 2022 and has since fallen by over 68% to 2.86%, as of August 2025.
• An average of less than 30,000 jobs per month has been created over the past three months.
• The Fed’s caution, while understandable given the uncertainty surrounding public policy and global macroeconomic conditions, has further dampened economic growth, which will likely require the Fed to reduce interest rates more.
• The muni curve slope is now more than double the +120 bps of the US Treasury curve slope, further illustrating the relative cheapness of the longer duration munis.
• No, interest rates are not rising.
• We would recommend extending duration to lock in higher yields for the long term.

Since the launch of the Fed easing cycle in September 2024, some have claimed that the Fed was cutting interest rates for the “right” reasons. The persistent view was that the economy had grown rapidly during the three years following the pandemic. Therefore, an eventual slowdown in GDP growth was to be expected. Some believed that the Fed’s decision to begin cutting rates in September 2024 was not a harbinger of weaker economic growth and deteriorating employment environment, rather, it was a “normalization” of interest rates to a level that was better suited to a slower growth environment. The Fed’s decision to begin cutting the Federal Funds rate was seen as a minor adjustment, necessary to better align financial conditions with a more stable, albeit slower, economic growth trajectory.

Conversely, our contention has been that the Fed’s decision was, in fact, the launch of a necessary easing cycle, with the goal of forestalling further declines in GDP growth and arresting the decline of what appeared to be a weakening labor force. Our view remains that the Fed did not embark on a path of rate cuts to simply normalize market conditions. We firmly believe the Fed foresaw increasing risks of further economic deceleration and its impact on unemployment, which is why they were compelled to act. We now see the Fed’s actions were not only warranted, but also insufficient, given the downward trajectory of economic conditions and US payrolls that are now evident, as illustrated by last Friday’s extremely weak payroll report, see Figure 1. The recent Bureau of Labor Statistics (BLS) payroll revision showing downward revisions of a record 911,000 jobs in the year through March 2025, further demonstrates the weakness of the current job market.

The Fed’s dual mandates of stable prices and maximum employment have been in tension for some time. While inflation has fallen dramatically since its peak in 2022, job gains, until this year, appeared to be stable. The Consumer Price Index (CPI) peaked at 9.1% in 2022 and has since fallen by over 68% to 2.86%, as of August 2025.  The Fed’s stated goal of 2.00% inflation is now within reach, yet some remain fearful that upward pressure from tariffs could cause a reversal in this multi-year, downward trend in CPI.  It is important to note that we are not of that view. It remains our expectation that any increase in prices, due to tariffs, will likely prove temporary. Our confidence in the continuation of the broad decline in inflation is supported by the expectation that tariffs are unlikely to increase again in 2026. Therefore, we expect a further moderation in inflationary pressure as we look to the back half of 2026.

Greater concern should now turn to the apparent weakness in the labor market, in our view. The recent release of the August payroll report confirms that a dramatic slowdown in job creation is now occurring.  An average of less than 30,000 jobs per month has been created over the past three months.  While this outcome was well below the expectations of many strategists, it is consistent with our expectations for a weaker jobs market. Of particular significance is the notion that the US economy is no longer creating sufficient jobs to employ newly formed households, despite the arguable decline in the breakeven rate. This slowdown in jobs and corresponding rise in unemployment requires action by the Fed. Unfortunately, this Fed has been slow to act. The Fed’s caution, while understandable given the uncertainty surrounding public policy and global macroeconomic conditions, has further dampened economic growth, which will likely require the Fed to reduce interest rates more than otherwise would have been necessary, had they been more proactive in their easing.

What does this mean for municipal bond investors?

The muni market has endured a multitude of slings and arrows year-to-date, plagued by uncertainties affecting institutional and retail investors alike. Given these pressures, it should surprise very few that municipal bond returns struggled during the first half of 2025 as the tax-exemption of munis was under threat and the market was forced to absorb the highest level of new issuance in its history. With that uncertainty now fading, given the passage of the One Big Beautiful Bill Act, which preserved the tax-exemption of munis, coupled with steadier technical conditions, we believe that munis are positioned to perform well going forward. Municipal bond yields are now delivering compelling tax-free income that is among the highest in over a decade. Long duration municipal bonds are particularly attractive, in our view, given the high taxable equivalent yields investors can achieve by extending out the curve. We have expressed this view in our strategies to date, and we believe that our client portfolios are well positioned for the expected change in interest rates. The AAA municipal bond curve slope 2s/30s, the additional yield investors receive by extending from 2-year to 30-year maturities, is now +225 basis points. The muni curve slope is now more than double the +120 bps of the US Treasury curve slope, further illustrating the relative cheapness of the longer duration munis.

Given that yields on short-term municipal bonds have fallen year-to-date, they now provide little compensation for the reinvestment rate risk investors are exposed to, should interest rates fall further, as is our expectation. For example, 2-year AAA rated municipal bonds now yield a paltry 2.1% compared to the +4.2% yield that AAA 20-year munis offer, as of 9/8/25. Investors, with a long-term investment horizon, can lock in taxable equivalent yields of approximately 8% to 9% or higher, depending on their tax bracket, final maturity, and state of residence, see Figure 2. When one also considers that the Fed is expected to cut interest rates by 1.50% to 1.75% by the end of 2026, according to the Fed’s Statement of Economic Projections (SEP), we would argue the window of opportunity for investors to act on this opportunity could be closing.

I heard interest rates are rising. Is that true?

No, interest rates are not rising.  In fact, interest rates have been declining since the fall of 2023. Yet, one of the common concerns we still hear from investors is that extending the duration of their municipal bond holdings increases risks given expectations for rising rates. We caution that view, as it implies that short-term bonds carry little or no risk.  While it is fair to say that short-term bonds are less sensitive to changes in interest rates, they are also now substantially lower yielding. Investors in short-term instruments are at risk of leaving potentially hundreds of basis points of yield and total return on the table, should interest rates continue to fall.

The economy is at an important inflection point. Declining payrolls and slowing growth should sufficiently motivate the Fed to cut rates further. The cutting of interest rates is a realization that economic conditions are too tight, and the US economy has slowed considerably, putting future job creation at risk. Its also reasonable to expect short-term yields on cash and short duration securities to continue falling in the weeks and months ahead. In an effort to overcome the substantial decline in income, investors with large allocations to cash and short duration instruments will likely experience going forward, we would recommend extending duration to lock in higher yields for the long term. For investors paying taxes, the cheapness of municipal bonds, relative to other fixed income investments, presents a compelling opportunity to achieve equity-like returns, just from the tax-free cash flow that municipal bonds offer, with historically lower risks than comparable asset classes. Should interest rates decline further, principal appreciation could also be significant. Given that this investment opportunity will likely prove to be temporary, we recommend clients and advisors act expeditiously to take advantage of the current municipal bond market dislocation while they still can.

Should you have any questions about this commentary or best manner in which to capitalize on the opportunities we are seeing in the market today, please do not hesitate to reach out to us directly.

Kind Regards,

Andrew Clinton

CEO