Whitney Sweeney, Senior Client Portfolio Manager at Macquarie Asset Management, joined Keith Black, Managing Director of RIA Channel, to discuss the technical factors creating opportunities for active investors in municipal bonds in 2025.
Macquarie Asset Management’s Municipal Bond Team has a long history of managing municipal bond portfolios and has won the Barron’s Best Fund Families tax-exempt bonds category for two of the last five years.1 The portfolio management team prioritizes generating a high level of tax-free income, which is the key driver of total return over time. An investment process that focuses on the yield component of total return helps mitigate price volatility in both rising and declining interest rate environments. The portfolio management team uses Lipper income distribution rankings among its funds’ peer groups as a scorecard, and the funds across Macquarie’s municipal bond platform consistently rank in or near the top decile for distributed income. The team achieves this high level of income distribution without using leverage.
The Municipal Bond Team recently launched its second fixed income exchange-traded fund (ETF), Macquarie National High-Yield Municipal Bond ETF (HTAX), expanding access to the team’s suite of municipal bond capabilities. HTAX is a follow-up to the team’s first actively managed municipal bond ETF, Macquarie Tax-Free USA Short Term ETF (STAX).
ETFs are capturing a rising share of municipal bond market assets. In the first half of 2025, nearly 90% of municipal bond inflows were invested in ETFs.2 Active ETFs, accounting for less than 20% of ETF assets, represented more than 40% of inflows in 2024 and have risen to 60% of ETF inflows in the first half of 2025. Sweeney notes that active management makes sense in the US municipal bond market, as the market is fragmented across thousands of issuers and millions of bonds. There is limited institutional credit research, and many bonds trade infrequently with no central exchange. These inefficiencies can create opportunities for active managers to add value through credit research and exploiting market dislocations. As a result, Sweeney states that actively managed municipal bond funds have historically outperformed passive funds.
The municipal market has been volatile in 2025 due to uncertainty regarding potential changes to the tax-exempt status of municipal bonds, which was being considered as one of the ways to help pay for extending the tax cuts for the 2017 Tax Cuts and Jobs Act. The market is on pace for record issuance in 2025, with borrowers having pulled forward deals to get in front of potential changes to the tax exemption. Long-dated municipal bonds have experienced some of the highest yields since COVID-19 or the global financial crisis. This is not due to the credit weakness of the issuers but rather to the high level of supply and volatility caused by the uncertainty of tariffs and the status of the municipal tax exemption.
The ratio of municipal yields to Treasury yields indicates that municipal bonds are attractive relative to Treasurys, especially at the long end of the curve. This attractiveness is particularly notable given that the elevated yields are due to a technical event and not driven by weakening credit fundamentals. High yield bonds make up about 10-12% of the municipal bond market, but have attracted roughly 40% of municipal fund flows in the first half of 2025.3 While overall municipal bond issuance is on a record pace, high yield issuance has declined. This strong demand for high yield municipal bonds, coupled with a lower level of supply, sets up a strong technical for the asset class. High yield municipal bonds have historically defaulted at about a quarter the rate of high yield corporates. On a tax-adjusted basis, high yield municipal bonds have been the best-performing fixed income sector over the past five years.
Resources:
Harnessing the high yield municipal bond advantage
Disclosures
Data as of May 31, 2025.
1. Barron’s Best Fund Families ranked Macquarie Asset Management #1 in the tax-exempt bond category for 2023 and 2020. The ranking looks at one-year relative performance of fund firms that offer a diversified lineup of actively managed mutual funds and ETFs. The ranking eliminates index funds. Results are based on firms’ skill in active management. Ranking calculates returns before any 12b-1 fees are deducted. Similarly, fund loads, or sales charges are not included in the return calculations. 49 asset managers were included in Barron’s one-year ranking list for the year ending December 31, 2023. 53 asset managers were included in Barron’s one-year ranking list for the year ending December 31, 2020. In 2020, the Macquarie Municipal Bond Team was listed under Delaware Management. This ranking is not based on total return. The ranking is the opinion of Barron’s and not Macquarie Group. No such person creating the ranking is affiliated with Macquarie Group. There can be no assurances that other providers or surveys would reach the same conclusions as this ranking.
2. LSEG Lipper Global Fund Flows, SimFund.
3. LSEG Lipper Global Fund Flows.
Funds in the Lipper Classification categories are ranked within a universe of funds similar in portfolio characteristics & capitalization and similar in capitalization, respectively. Lipper Inc, is a nationally recognized organization that ranks the performance of mutual funds.
Lipper Inc. rankings are based on fund total returns for the periods shown. Rankings do not take into account sales charges but include reinvestment of dividends and capital gains, if any. The number of funds in each category periodically changes. Multiple share classes of a fund have a common portfolio but impose different expense structures. Past performance does not guarantee future results.
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