The Time to Act: Long-Dated Municipal Bonds Offer a Rare Yield Opportunity in 2025

Amid a landscape of rising yields and fiscal uncertainty, long-dated municipal bonds are emerging as one of the most compelling income-generating opportunities for investors in 2025. JPMorgan's forecast of $560 billion in municipal bond sales this year underscores a market primed for both growth and yield-driven strategies. With tax advantages, resilient credit quality, and a historical precedent for outperformance during periods of fiscal stress, long-dated munis present a rare intersection of safety and reward. But investors must act swiftly—current yields may not last.

The Confluence of Rising Yields and Tax Advantages

The municipal bond market is experiencing a rare confluence of factors that make long-dated bonds attractive. Yields on the Bloomberg Municipal Long Bond Index (22+) have surged to 6.91% on a tax-equivalent yield (TEY) basis—the highest in nearly two years—as new issuance hits record levels.

This widening yield advantage over Treasury bonds is amplified by the tax-exempt status of municipal interest. For investors in the top federal tax bracket (37%), the taxable-equivalent yield of a 6.91% municipal bond is equivalent to a 11.1% taxable yield—a stark contrast to the 4.5% yield on 10-year Treasuries. With the Tax Cuts and Jobs Act (TCJA) set to expire at year-end, this advantage could grow stronger, as higher federal tax rates would boost the value of tax-free income.

Resilient Creditworthiness Amid Climate Risks

While climate disasters like the Los Angeles wildfires have strained utilities' balance sheets, municipal credit quality overall remains robust. State and local governments hold AA− ratings or higher on average, with rainy-day funds bolstered by post-pandemic surpluses. Even amid rising disaster costs, defaults remain vanishingly rare: only 0.02% of municipal bonds defaulted in 2024.

The key distinction lies in issuer types. While utilities and investor-owned entities face greater liability risks (e.g., Southern California Edison's downgrade to BBB-), general obligation bonds backed by state and local governments remain bulletproof. This resilience is critical for long-dated investors, as it ensures principal safety even as climate-related liabilities mount.

Historical Precedent for Outperformance

History favors municipal bonds in periods of fiscal and geopolitical uncertainty. During the 1980s, when inflation averaged 5%, munis delivered 12% annual returns on a TEY basis—a stark contrast to the S&P 500's 11% total return. Today, with the Federal Reserve's cautious rate stance keeping real yields low, munis are poised to repeat this outperformance.

The current yield environment mirrors the 2007-2008 period, when munis with yields above 7% delivered 5.5% to 12% returns over the next two years. With yields now near that threshold, the setup is compelling.

Actionable Strategies: ETFs to Seize the Moment

For individual investors, the best way to access this opportunity is through long-duration municipal bond ETFs, particularly those with a tax-advantaged focus:

1. Vanguard Long-Term Tax-Exempt Fund (VTEB): Tracks the Bloomberg Municipal Long Bond Index, offering exposure to bonds with 22+ year durations. Its 6.8% yield and $30 billion in assets under management provide liquidity and diversification.
2. Vanguard Tax-Advantaged Strategy Fund (VOTES): Combines long-dated munis with Treasury Inflation-Protected Securities (TIPS), leveraging the tax-free advantage while hedging against inflation. Its 5.9% yield balances income with flexibility.

Both ETFs are ideal for long-term portfolios, but timing is critical. The reinvestment of $140 billion in maturing bonds between June and August 2025 could stabilize yields, but rising supply may pressure prices downward.

The Case for Immediate Action

The window to lock in these yields is narrowing. Three factors are creating urgency:
- Supply pressures: Q2 2025's issuance is expected to be the second-largest ever, potentially overwhelming demand and pushing yields higher.
- Tax policy uncertainty: If Congress extends TCJA provisions, it could reduce the urgency for issuers to borrow now—shrinking the supply of high-yielding bonds.
- Inflation dynamics: While core inflation is cooling, services-sector prices remain stubbornly high. A surprise inflation spike could push Treasury yields higher, indirectly lowering muni prices.

Conclusion: A Rarity Worth Chasing

Long-dated municipal bonds are a rare anomaly in today's market: a high-yielding, tax-advantaged asset class with credit risk comparable to U.S. Treasuries. The confluence of infrastructure-driven issuance, expiring tax policies, and historical yield cycles creates a compelling case for strategic allocation.

Investors should act now to capture these yields before supply pressures ease or tax policy shifts dilute the advantage. ETFs like VTEB and VOTES offer a low-cost, diversified entry point into a market poised to reward income seekers. This is not just an opportunity—it's a fleeting one.