MacKay Municipal Managers™, the municipal bond team of specialty fixed income manager MacKay Shields, today provides an update to its predictions for the municipal bond market in 2025. At the start of the year, MacKay Municipal Managers asserted that investors should make meaningful municipal allocations as the market continues to offer investors compelling investment opportunities.

“Yield levels remain elevated with attractive valuations relative to taxable debt and U.S. equities, which are facing some headwinds with the changing market environment,” said David Dowden, Managing Director and Portfolio Manager at MacKay Municipal Managers. “We believe investors have an opportunity to take advantage of the favorable conditions of the current fixed income market, especially with the attractive levels of municipals relative to treasuries.

MacKay Municipal Managers – Top Five Municipal Market Insights for 2025: Mid-Year Update

1. Traditional tax-exemption persists, and we believe it’s as attractive as ever: On Target
   
   We believe it’s a buyer’s market. Municipals look attractive relative to U.S. Treasuries. Pre-tax, a 30-year AAA municipal bond currently yields 94% of a 30-year U.S. Treasury — even as the Treasury hovers near 5%, a level last seen in 2023 and, before that, not since 2007. On a taxable-equivalent basis, that figure jumps to 158%. At these yield levels, that ratio reflects not only relative value, but also an opportunity to capitalize on high yields on long-term tax-exempt income (Source: Bloomberg as of 6/30/2025).
2. Capitalizing on the supply wave will require seizing initiative in multiple ways: On Target
   
   Tax-exempt municipal bond new issue supply through June 30, 2025, totaled $256 billion, a 16% increase year-over-year and a 49% increase over the five-year trailing average. This marks the highest issuance on record for the first half of any year, surpassing the previous peak set in 2007 by 9% (Source: JP Morgan as of 6/30/2025). Municipal-to-Treasury ratios cheapened by 6 to 14 basis points (bps) across the 5- to 30-year range since the start of the year, mostly due to supply-driven pressures (Source: Bloomberg as of 6/30/2025).
3. Selection comes to the fore of the investment-grade market: On Target
   
   After years of steady improvement, credit rating actions remain net positive, though they may have passed their peak. Year to date (YTD), General Obligation issuers have been upgraded 1.26 times for every downgrade; a decline from 2024, when the ratio for the full year was 2.13 (Source: Bloomberg, 6/30/2025). Municipal credit remains fundamentally sound, but headlines can influence investor behavior, leading to temporary market dislocations and pockets of relative value. In our view, this is where continuous, 24/7 credit research and surveillance can provide a meaningful edge.
4. The high yield market is likely to outperform investment grades again, despite historically tight spreads: Pending
   
   So far this year the Bloomberg HY Municipal Index is outperforming the Bloomberg Municipal Index (IG) by 2 bps (Source: Bloomberg as of 6/30/2025). The yield differential between the Bloomberg High Yield Municipal Index and the Bloomberg Investment Grade Municipal Index has been stable this year, only increasing from 177 bps to 186 bps, a level that is still historically tight. For context, the differential has been higher than 186 bps, 87% of the time over the past 10 years (Source: Bloomberg as of 6/30/2025).
5. The front end of the municipal yield curve should outperform cash-like instruments: On Target
   
   Beware re-investment. Taxable and tax-free money market fund yields have declined in 2025, with taxable funds falling from an average of 4.16% at the start of the year to 3.90%, a drop of 26 bps. Tax-free fund yields fell from an average of 3.21% to 2.23%, a drop of 98 bps (Source: Morningstar as of 6/30/2025). On a taxable-equivalent basis, the 3-Year Municipal Index yield-to-worst is 5.02%, offering a 112 bps advantage over taxable money market funds (Source: Bloomberg as of 6/30/2025). The Bloomberg 3-Year (2–4 Year) Municipal Index has outperformed taxable money market securities on an after-tax basis by 114 bps year-to-date (YTD) (Source: Bloomberg, Morningstar as of 6/30/2025). The 3-Year Municipal Index has also outperformed tax-free money market funds by 86 bps YTD (as of June 5, 2025) (Source: Bloomberg, Morningstar as of 6/30/2025).

“We believe that based on the current fundamentals of the market, munis should play a more significant role in investors’ portfolios to capture tax-exempt income, credit fundamentals, and relative value,” said Dowden. “As we look to the second half of the year, it is our view that active management, grounded in bottom-up credit research and focused on uncovering relative value, remains essential to unlocking the potential of this market.”

About New York Life Investments

With over $754 billion in assets under management as of March 31, 2025, New York Life Investments, a Pensions & Investments’ Top 30 Largest Money Manager*, is comprised of the affiliated global asset management businesses of its parent company, New York Life Insurance Company, and offers clients access to specialized, independent investment teams through its family of affiliated boutiques. New York Life Investments remains committed to clients through a combination of the diverse perspectives of its boutiques and a long-lasting focus on sustainable relationships.

*New York Life Investment Management was ranked the 26^th largest institutional investment manager in Pensions & Investments' Largest Money Managers 2024 published June 2024, based on worldwide institutional AUM as of 12/31/23. No direct or indirect compensation was paid for the creation and distribution of this ranking.

About MacKay Municipal Managers™

MacKay Municipal Managers™ is a recognized leader in active municipal bond investing and is entrusted with $80 billion in assets under management, as of March 31, 2025. The team manages a suite of highly rated municipal bond solutions available in multiple vehicles. MacKay Municipal Managers™ is a fundamental relative-value bond manager that combines a top-down approach with bottom-up, credit research. Our investment philosophy is centered on the belief that strong long-term performance can be achieved with a relative value, research driven approach in a highly fragmented, inefficient municipal bond market.

About MacKay Shields LLC

MacKay Shields LLC (together with its subsidiaries, "MacKay")*, a New York Life Investments company, is a global asset management firm with $152 billion in assets under management** as of March 31, 2025. MacKay manages fixed income strategies for high-net worth individuals and institutional clients through separately managed accounts and collective investment vehicles including private funds, collective investment trusts, UCITS, ETFs, closed end funds and mutual funds. MacKay provides investors with specialty fixed income expertise across global fixed income markets including municipal bonds, high yield bonds, investment grade bonds, structured credit, and emerging markets debt. The MacKay Shields client experience provides investors direct access to senior investment professionals. For more information, please visit www.mackayshields.com or follow us on Twitter or LinkedIn.

* MacKay Shields is a wholly owned subsidiary of New York Life Investment Management Holdings LLC, which is wholly owned by New York Life Insurance Company. "New York Life Investments" is both a service mark, and the common trade name of certain investment advisers affiliated with New York Life Insurance Company.

** Assets under management (AUM) as of March 31, 2025 represents assets managed by MacKay Shields LLC and its subsidiaries but excludes certain accounts and other assets over which MacKay Shields continues to exercise discretionary authority to liquidate but which are no longer actively managed.

For more insights from MacKay Municipal Managers™ and our New York Life Investments affiliates click here.

No products and services provided by MacKay Shields LLC are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. Nothing herein constitutes investment advice nor should be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction. This material contains the opinions of the MacKay Municipal Managers™ team of MacKay Shields LLC but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Certain information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements.

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We believe that based on the current fundamentals of the market, munis should play a more significant role in investors’ portfolios