Behind the Yield with John Miller on Where Munis Go from Here

This week’s episode of Industry Insights: Exclusive Interviews examines municipal bonds at a critical juncture in 2025. Host Julie Miecamp and reporter Hoa Nguyen sit down with John Miller, Chief Investment Officer of First Eagle’s Municipal Credit Team, to dissect how the market is responding to tax policy uncertainty, April’s rate volatility, and evolving investor sentiment across key sectors.

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Policy Landscape: Tax Exemption Survives Initial Scrutiny

The municipal bond market received preliminary relief as the House Ways and Means Committee’s first draft of the 2017 tax cut extensions left the municipal tax exemption largely untouched. Miller, drawing from three decades in the market, emphasized the fundamental importance of tax-exempt municipal financing to U.S. infrastructure.

“Recent studies have shown that municipal finance is the tool that raises upwards of 90% of all the dollars utilized for infrastructure construction costs,” Miller explained. The exemption, which predates the personal income tax itself, remains critical to states and localities funding essential services across all income demographics and communities.

The proposed increase to the SALT cap from $10,000 to $30,000 represents another significant development. This change could stabilize residency patterns among high-income earners who have migrated from states like California and New York to Texas and Florida since 2017. For municipal bond investors, state-exempt bonds remain attractive even with the higher SALT cap, as the federal tax exemption at the 37% bracket appears likely to remain unchanged.

Market Dynamics: April’s Shock and Recovery

April’s tariff-driven volatility provided a stark reminder of how quickly municipal bond markets can reprice. Treasury yields on the 10-year increased by 50 basis points in one week—the largest weekly increase since 1987—with municipal bonds experiencing even sharper moves due to heavy supply and seasonal weakness ahead of tax day.

The sell-off revealed important structural differences within the municipal investor base. ETFs experienced significant outflows of several billion dollars as rapid-trading strategies repositioned quickly, while mutual funds and separately managed accounts showed much more stability. This divergence highlighted the technical rather than fundamental nature of the April correction.

Miller noted that municipal bonds have since begun recovering, with the market demonstrating resilience through maintained liquidity and relatively contained credit spread widening. The episode reinforced municipals’ role as a safe haven during broader market uncertainty.

Sector Analysis: Opportunities Amid Headwinds

High-Yield Opportunities

In the current environment, Miller identifies compelling value in BB-rated bonds on the longer end of the yield curve, offering some of the most attractive absolute yields in 20 years. Airports, toll roads, and ports present particular opportunities, benefiting from established revenue streams and essential service characteristics.

State housing authority bonds, typically rated AA or AAA with over-collateralization and sometimes state guarantees, are trading above 5% tax-exempt yields—an unusual opportunity for high-quality, liquid paper.

Property Tax-Backed Credits

Property tax liens continue to demonstrate exceptional credit performance, with very few instances of distress since 2008. Demographic trends including millennial housing demand, overall housing shortages, and limited developable land support this sector’s stability. The economic reality that defaulting on property tax liens effectively means forfeiting entire projects creates powerful incentives for continued payment.

Senior Living: Risk and Reward

Senior living remains one of the more volatile high-yield sectors, requiring careful credit selection. For startup facilities, Miller emphasizes the critical importance of liquidity resources extending through both construction and lease-up periods—potentially twice as long as projected timelines.

Key factors include access to equity contributions, gift of land, or network support to reduce debt leverage below 100%. Location matters significantly, particularly regarding the local housing market’s ability to provide liquidity for potential residents selling homes to fund senior living costs.

Despite project-level risks, powerful demographic trends continue to support long-term demand for senior living facilities as the population ages.

Charter Schools: Small but Growing

The charter school pipeline remains robust across multiple states including Florida, Texas, Pennsylvania, Minnesota, and North Carolina. These typically smaller, early-stage schools require comprehensive security packages including direct intercept from state funding, clean mortgage liens on real estate, and tight coverage covenants with quick remedial action triggers.

The current market environment allows investors to demand stronger covenant packages, as borrowers face greater scrutiny during periods of uncertainty and volatile fund flows.

Higher Education: Selective Opportunities

While headline-grabbing legal challenges involve AAA-rated institutions like Harvard, thousands of smaller colleges face genuine macro headwinds. Declining high school graduation rates projected to continue at 1% annually, combined with student preferences favoring larger institutions, create challenges for smaller schools.

However, this broad brush approach creates opportunities to identify stable institutions with strong local reputations, waiting lists, and solid academic track records that may be undervalued due to sector-wide

Looking Ahead: Fundamentals vs. Policy Noise

Despite policy-driven volatility, underlying municipal credit fundamentals remain solid. GDP growth, employment trends, tax collections, and recent inflation reports all support a favorable environment for municipal bonds. The Federal Reserve’s pause in rate cuts due to tariff-related inflation concerns may prove temporary if disinflationary trends continue.

Miller anticipates the Fed could resume its cutting cycle with a couple of reductions before year-end, assuming inflation moves closer to the 2% target. Combined with stabilizing interest rates and continued strong credit metrics, the municipal market appears positioned for a stronger second half of 2025.

The key variable remains policy implementation and its economic effects. As Miller observed, “It’s positive so far that munis were left out of the first draft coming from the House Ways and Means Committee,” but the multi-month legislative process ahead will require continued monitoring.

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Produced and edited by two-time Emmy Award-winning producer Tanya Hubbard.