Guggenheim Municipal Income Fund: Outperforming Despite Municipal Lag

The Guggenheim Municipal Income Fund (GIJIX) enjoyed a strong third quarter, delivering a 3.5% return that beat its benchmark by half a percentage point, according to its institutional class results. This short-term success followed a broader municipal bond strength in Q3, with the fund particularly benefiting from investments in school districts, general purpose, and housing bonds. However, this quarterly shine masks a longer shadow. Looking back a full year, GIJIX's 2.31% total return still lagged its benchmark index, which returned 1.39% over the same period. The real gap widens dramatically when we look back a decade: GIJIX's 10-year annualized return sits at just 2.02%, compared to the index's 2.34%. This persistent underperformance, especially over ten years, raises questions about the fund's underlying strategy in a market facing high issuance and rising interest rates, even as its relatively low expense ratio offers some cost efficiency.

Despite a rocky start to 2025, municipal bonds are finding pockets of strength through tactical offensive moves. The asset class faced significant headwinds, suffering as the worst-performing fixed income sector year-to-date due to surging issuance - the highest since 2010 - driven by inflation and infrastructure spending. This flood pressured longer-dated bonds, even as tax-exempt yields hit multiyear highs around 4%, making them particularly attractive for investors in federal brackets of 22% or higher compared to corporate bonds after taxes. While credit fundamentals show signs of strain, with 26 defaults recorded in the first half, primarily in higher-risk sectors, the overall quality remains robust, with 72% of outstanding munis rated AAA/Aaa or AA/Aa. The Guggenheim Municipal Income Fund exemplifies this growth offensive approach, delivering a 3.5% return in Q3 2025, outpacing its benchmark by 0.5%. Their success highlights how focused allocation to high-impact areas like school districts, general purpose, and housing bonds can generate alpha even in a high-yield, higher-interest rate environment fraught with risks like tightening spreads and revenue shortfalls.

The market's relative value opportunities, particularly in select sectors and A/AA-rated bonds anticipated for the second half, underscore the potential for disciplined offensive strategies to thrive amid turbulence.

The municipal bond market faces headwinds in 2025, yet these challenges mask strategic opportunities for income-focused investors. While credit fundamentals show strain-evidenced by 26 defaults year-to-date, mostly in high-risk sectors-and record $450 billion in new issuance pressures longer-dated bonds, the landscape now offers compelling entry points for those prioritizing growth. Tax-exempt yields have hit multiyear highs, creating attractive income floors amid a steeper yield curve. Crucially, two near-term catalysts align with a growth-oriented approach: the anticipated Federal Reserve rate cuts and the looming court ruling on Medicaid funding under the OBBBA legislation. Rate cuts would likely steepen the yield curve further, benefiting active duration management, while the Medicaid ruling could unlock fiscal flexibility for state budgets. This convergence suggests a window for tactical advantage, particularly as penetration in higher-quality A/AA-rated segments expands and active strategies-like barbell maturity structures-position investors to capture both income stability and capital appreciation potential.

Despite municipal bonds' sharp underperformance year-to-date as the worst-performing fixed income asset class, driven by record issuance costs, their current valuation presents a potential entry point for risk-conscious investors. The Bloomberg Municipal Bond Index's 4% tax-exempt yield now significantly outperforms corporate bonds after taxes for investors in federal brackets of 22% or higher, a key advantage that remains intact. This relative value is amplified by a steeper two-year/10-year yield curve, offering 60 basis points more compensation for duration risk compared to flatter curves. While credit quality stays robust with 72% rated AAA/Aaa or AA/Aa, the recent selloff creates opportunities if fund managers can navigate the high issuance environment effectively. Cost efficiency further enhances appeal; funds like Guggenheim Municipal Income (GIJIX) demonstrate low expense ratios around 0.54%, potentially boosting net returns as market conditions stabilize. If duration management improves and issuance moderates in late 2025, the combination of attractive after-tax yields, steeper curve compensation, and lower costs could generate meaningful upside for investors entering at current levels.