Municipal bond investors ended 2025 with solid positive returns, overall, as interest rates remained relatively stable during the quarter. Performance all along the municipal bond yield curve was inconsistent, as the seven to ten-year area significantly outperformed, while long-term debt (22+ years) trailed notably due to lingering inflation concerns. Record amounts of new issue supply acted as a headwind to municipal bond performance in 2025 and is likely to remain prolific into the new year.
With three interest rate cuts already in place, handicapping Federal Reserve policy in 2026 will likely be more challenging for bond investors. Inflation remains well above the Central Bank’s 2% target, and a persistently weak dollar is creating a potential demand problem for the U.S. Treasury and its massive funding needs. We are particularly concerned about the upward trajectory of Japanese government bond yields, which may keep historically one of the biggest buyers of U.S. Treasury debt on the sidelines. With Japanese government debt payments currently soaking up onethird of their overall revenue, it is easy to see where a spike in the borrowing costs could negatively affect bond yields globally. Should repatriation become more attractive in the months ahead, there would be little the Federal Reserve could do to keep longer-term interest rates down. Japanese investors own approximately three trillion in U.S. assets, which is why bond investors need to watch the inflation data coming out of that country very carefully.
Overall, credit quality in the municipal bond market remains reasonably healthy. One sector we continue to avoid is healthcare. Due to the passage of the “One Big Beautiful Bill,” Medicaid cuts are expected to result in 11.8 million people in the United States losing their health insurance over the next ten years. If there is no resolution put forth by Congress on ACA subsidies before January 1, 2026, more than 20 million Americans will likely see a massive spike in premiums – which could dampen the finances of many hospitals across the country. This sector’s performance lagged the overall market in 2025 and is likely to do so again in the new year.
Our proprietary credit research is the backbone of our investment process. A quick note of congratulations is in order for our own Joseph Salvatore, who was nominated by Smith’s Research and Gradings for “Best Buyside Director of Research” in 2025.
Happy New Year!
Regards,Michael Pietronico
Founding Partner
Miller Tabak Asset Management
mpietronico@millertabak.com
www.millertabakam.com
(212) 850-8103
Twitter (“X”): @MillerTabak