NEW YORK — Dec. 22, 2025 — Municipal bonds have quietly reclaimed the spotlight heading into year-end, helped by easing policy rates, resilient issuer finances, and a demand backdrop that’s proving tougher to shake than many expected after the historic outflows of 2022–2023.
Fresh third-quarter commentaries from Fidelity, Macquarie Asset Management, and PGIM Investments—covering a broad national tax-free strategy, a short-duration muni fund, and the muni market’s wider technicals—tell a consistent story: Q3 2025 was the quarter the municipal market “found its footing” again, largely on the back of a September rally tied to monetary easing and investor inflows. [1]
Now, investors are asking a more urgent question: What does that Q3 rebound mean for tax-free income positioning today, on Dec. 22, 2025, with the Federal Reserve having already delivered significant cuts and some officials signaling a potential pause?
Below is what the latest fund-manager commentary—and today’s rate and issuance backdrop—suggest about where municipal bonds may be headed next.
Q3 2025 was the “rate-cut rally” quarter that revived tax-free returns
Across the three updates, Q3’s driver looks clear: rates fell, demand returned, and September’s rally did the heavy lifting.
- Macquarie notes the Bloomberg Municipal Bond Index returned 3.00% in 3Q25, and attributes the quarter’s positive performance to softer economic and employment data that catalyzed monetary easing, followed by a strong September rally. [2]
- Fidelity says “resurgent investor demand” and a September policy interest-rate cut boosted investment-grade, tax-exempt muni returns, helping the market rebound from a weaker first half. Fidelity’s commentary also puts the year-to-date advance at 2.64% at the time of its update. [3]
- PGIM highlights how the short-to-intermediate part of the curve benefited too, with its Short Duration Muni Fund Class Z returning 2.22% net of fees in Q3, outperforming its benchmark (the Bloomberg 1–8 Year Municipal Index). [4]
The practical takeaway from Q3 isn’t just that munis rallied—it’s how they rallied: managers emphasize that investor inflows and spread tightening mattered, not only the directional move in Treasury yields. [5]
That distinction is important for 2026 positioning because muni performance often hinges on market “technicals” (supply vs. reinvestment demand, mutual-fund flows, dealer balance sheets) as much as it hinges on macro forecasts.
Macquarie’s big-picture message: record supply, strong credit, and uneven sector leadership
While the Fidelity and PGIM notes focus on fund-level performance and positioning, Macquarie’s market commentary underscores three themes that matter for anyone allocating to tax-free bonds now:
1) Issuance has been heavy—and historically notable
Macquarie says year-to-date municipal issuance was at a record-setting pace totaling more than $430 billion, and expects that pace could continue through 4Q25. [6]
That Q3 snapshot lines up with where the market appears to have landed by mid-December: Western Asset estimates year-to-date new-issue supply around $565 billion, up year-over-year, with tax-exempt issuance up meaningfully versus the prior year. [7]
2) Credit remains “fundamentally strong”—with caveats
Macquarie argues municipal credit remains strong, supported by economic performance and the lingering benefits of prior fiscal support to state and local governments. [8]
Fidelity likewise points to strong fiscal positions across most issuers, which it says can provide resilience against potential downgrades even with a more cautious economic outlook. [9]
3) Not all munis performed the same in Q3
Macquarie highlights that long-duration and A-rated investment-grade munis outperformed, while high-yield segments—particularly tobacco bonds—underperformed. It also flags healthcare as the strongest sector and state general obligations as the weakest within the period it reviewed. [10]
That sector dispersion helps explain why active managers, even in “plain-vanilla” muni mandates, are emphasizing security selection and liquidity—not just benchmark duration.
Fidelity FTABX: leaning into healthcare and transportation while staying near benchmark duration
In its Q3 update, Fidelity Tax-Free Bond Fund (FTABX) positions itself as a diversified national muni approach investing across general obligation and revenue-backed bonds and across the yield curve. [11]
Key points from Fidelity’s commentary:
- Performance: FTABX returned 3.18% in Q3, outperforming the Bloomberg 3+ Year Non-AMT Municipal Bond Index (3.00%) and peer group measures referenced in the commentary. [12]
- Portfolio tilts: Fidelity emphasizes overweights in health care, transportation, and corporate-backed sectors, focusing on issue selection, liquidity, and financial resiliency. [13]
- Rate risk posture: The fund is keeping duration close to its benchmark, remains cautious on yield-curve positioning, and continues to look for long-maturity municipals with attractive yields given volatility. [14]
For readers scanning for what this means right now: Fidelity’s stance reflects a common institutional view heading into 2026—stay diversified, stay liquid, and don’t overreach on a single “rates call.”
PGIM Short Duration Muni: alpha from housing and airports, with a cautious eye on credit pockets
PGIM’s short-duration muni commentary is notable because it shows how, even with modest duration, managers found meaningful dispersion in Q3.
Highlights:
- Performance: Class Z returned 2.22% net in Q3, beating the Bloomberg 1–8 Year Municipal Index. [15]
- What worked:Housing bond selection and an overweight to airport bonds contributed as spreads tightened. [16]
- What hurt: Selection in IDB & PCR detracted, tied to positioning in metals and waste management bonds; PGIM also references curve positioning as a headwind in its “quick insights.” [17]
- Sector posture now: PGIM says it favors student loans, affordable housing, and prepay gas, while avoiding healthcare, highly leveraged universities, and local governments at risk from funding cuts. [18]
- Supply outlook: PGIM expects supply to moderate into year-end, potentially supporting muni valuations if the market moves toward net negative supply dynamics. [19]
The short-duration angle matters as investors debate whether 2026 will reward staying “up in quality and down in duration.” If the Fed pauses, the short end may not rally as much as it did earlier in the easing cycle—but short strategies can still win if credit selection and roll-down do their job.
Where muni yields sit right now on Dec. 22, 2025
Investors aren’t only reacting to Q3 performance—they’re reacting to today’s yield levels and the taxable-equivalent math that makes munis compelling in the first place.
On Fidelity’s yield table as of 10:26 a.m. ET on Dec. 22, 2025, median yields show:
- U.S. Treasuries: roughly 4.12% (10-year) and 4.83% (30-year+) median yields
- Municipals (Aaa/AAA): roughly 2.99% (10-year) and 4.40% (30-year+) median yields [20]
A separate market snapshot from FMSbonds, also dated 12/22/2025, lists approximate national yields of 2.80% (10-year AAA) and 4.20% (30-year AAA). [21]
Even allowing for methodology differences, the message is the same: tax-free yields remain elevated enough to matter, particularly for higher-bracket investors comparing muni income to corporates or Treasuries on an after-tax basis.
Today’s major bond headline: the Fed cut—and now officials are talking about pausing
Municipal valuations are tightly linked to the Fed’s next move, not only because of absolute yields, but because mutual fund flows tend to follow the direction of front-end rates.
On Dec. 22, 2025, Cleveland Fed President Beth Hammack said a pause in rate cuts is her base case “for some period of time,” until there is clearer evidence inflation is moving back to target or the labor market weakens more materially. [22]
That follows the Fed’s Dec. 10 quarter-point cut, which came with three dissents and updated projections showing meaningful internal disagreement over the path forward. [23]
For muni investors, the important second-order effect is this:
- If the market shifts from “cuts are coming” to “cuts are pausing,” the front end may stop rallying, potentially slowing the tailwind munis often get from rate-driven inflows.
- On the other hand, a pause could also reduce volatility—helpful for a market that often performs best when technicals (reinvestment demand and fund flows) can dominate.
The 30-year Treasury stayed near 4.8%—and that matters for long munis
Another Dec. 22 bond-market theme: long-duration rates have been surprisingly stable in 2025.
Reuters notes the 30-year U.S. Treasury yield was around 4.8% near year-end and had held roughly where it began the year, despite a noisy macro backdrop and a total of 75 basis points of Fed cuts in 2025. [24]
Why should tax-free investors care?
Because long municipal bonds tend to “price off” the Treasury long end plus or minus credit and technical factors. If the long end remains rangebound, the return profile for long munis becomes more income-driven—which makes credit selection, call structure, and liquidity more important than heroic duration bets.
Supply and demand are still the muni market’s north star—and demand has stayed resilient
The muni market’s 2025 story can be summarized in two words: heavy issuance and persistent demand.
Demand: inflows are back in force
Western Asset reports muni mutual funds recorded year-to-date inflows of $50 billion, extending the post-outflow rebound that began in 2024. [25]
In the week ending Dec. 10, Western Asset cites modest overall inflows, while also showing notable movement into short and short/intermediate buckets—consistent with investors still favoring lower duration amid uncertainty. [26]
Supply: 2025 issuance appears to have pushed past $560B
Western Asset pegs YTD supply around $565B. [27]
A separate municipal market recap carried by Fidelity, citing market participants, says issuance for this year will top $560 billion and notes that some expect supply to be at least $600 billion next year, as capital needs remain strong and fiscal dynamics evolve. [28]
A real-time example: NYC TFA’s $2B deal drew strong orders
One of December’s marquee transactions—the New York City Transitional Finance Authority’s $2 billion future tax-secured subordinate bond sale—offered a clear datapoint on demand:
- Approximately $1.83B tax-exempt and $168M taxable
- Retail orders near $621M and institutional priority orders around $3.2B (about 2.1x the offered amount)
- Final tax-exempt yields ranged from 2.58% to 4.64%, with some maturities repriced lower due to demand [29]
That kind of oversubscription matters because it reinforces what the Q3 commentaries implied: buyers are still stepping in, even with large supply and even after a strong rally earlier in the year.
What this means for municipal bond investors heading into 2026
The combined message from these Q3 commentaries and today’s market setup isn’t “munis will soar” or “munis are done.” It’s more nuanced—and more useful:
1) Duration decisions are back on the table, but managers aren’t swinging wildly
Fidelity is staying close to benchmark duration and remaining cautious on curve positioning. [30]
PGIM is explicitly aiming to maintain index-like duration while seeking durable sources of alpha. [31]
If the Fed pauses, the market’s next phase may reward balanced curve exposure and selective extension—not all-in duration trades.
2) Credit is strong in aggregate, but “pockets of pain” still matter
Macquarie’s note about high-yield underperformance—especially tobacco—echoes a broader truth: municipals are not immune to issuer-specific stress. [32]
PGIM’s explicit avoidance list (healthcare, highly leveraged universities, issuers vulnerable to funding cuts) reinforces that headline-level muni strength can mask meaningful dispersion. [33]
3) Technicals could stay supportive if cash rotates out of money markets
Western Asset points to the massive rise in money market assets since the hiking cycle began and argues that declining front-end rates could push some allocations toward higher-income fixed income alternatives like munis. [34]
4) Big issuance doesn’t automatically mean weak performance—if demand stays sticky
Macquarie’s record-pace issuance point and Western Asset’s higher YTD supply estimate both underline supply strength. [35]
But the NYC TFA order book shows that well-structured, high-quality deals can still clear at attractive levels and even reprice tighter when buyers show up in size. [36]
5) The “tax-free” value proposition remains the anchor
On Dec. 22, 2025, yield snapshots still show a clear gap between taxable benchmarks and tax-exempt yields—creating the taxable-equivalent story muni investors live and die by. [37]
Bottom line
The Q3 2025 commentaries from Fidelity, Macquarie, and PGIM frame municipal bonds as a market that regained momentum as policy eased, demand rebounded, and September’s rally reset valuations—but they also stress that 2026 outcomes may hinge less on dramatic rate forecasts and more on duration discipline, credit selection, and supply/demand technicals. [38]
With the Fed now debating whether to pause further cuts and long-end yields still commanding attention, tax-free investors heading into 2026 may find the best opportunities not in bold market timing—but in the unglamorous mechanics of muni investing: structure, sector rotation, liquidity, and after-tax math. [39]
References
1. seekingalpha.com, 2. seekingalpha.com, 3. seekingalpha.com, 4. seekingalpha.com, 5. seekingalpha.com, 6. seekingalpha.com, 7. www.westernasset.com, 8. seekingalpha.com, 9. seekingalpha.com, 10. seekingalpha.com, 11. seekingalpha.com, 12. seekingalpha.com, 13. seekingalpha.com, 14. seekingalpha.com, 15. seekingalpha.com, 16. seekingalpha.com, 17. seekingalpha.com, 18. seekingalpha.com, 19. seekingalpha.com, 20. fixedincome.fidelity.com, 21. www.fmsbonds.com, 22. www.investmentnews.com, 23. www.investmentnews.com, 24. www.reuters.com, 25. www.westernasset.com, 26. www.westernasset.com, 27. www.westernasset.com, 28. fixedincome.fidelity.com, 29. www.nyc.gov, 30. seekingalpha.com, 31. seekingalpha.com, 32. seekingalpha.com, 33. seekingalpha.com, 34. www.westernasset.com, 35. seekingalpha.com, 36. www.nyc.gov, 37. fixedincome.fidelity.com, 38. seekingalpha.com, 39. www.investmentnews.com
