FWR talked to CIBC's wealth management arm in the US about municipal bonds, the way they are valued and the major differences in categories. The firm argues that they are an important part of US portfolios.

The likelihood of US interest rates has, rightly or wrongly, become snagged in the political arena, with pressure from the White House on the central bank to cut interest rates. There have been cuts already – and it is unclear how far further reductions might go. According to a note last week from JP Morgan, said its global research team does not see rate cuts this month and expects the Fed to hold fire on rates for the rest of the year, holding the funds rate at 3.5 to 3.75 per cent.

With a background like that, those seeking investment returns in forms of public US debt can obviously go foraging in the thickets of the US Treasuries market. However, another area worth noting is the municipal debt field. In the third quarter of 2025, the outstanding value of “muni” bonds was $4.4 trillion, according to the Securities Industry and Financial Markets Association (SIFMA) in the US. 

Munis have a place in investors’ portfolios and their characteristics are worth understanding more thoroughly, Chris Lanouette, managing director at CIBC Private Wealth, told Family Wealth Report in a recent interview. He’s worked at the firm for more than 19 years. A market characterized by some slowing labor market pressures, and suggestions of economic softening is “constructive” for munis, he said.

“Historically high net worth clients have viewed the municipal sector as the ‘safe’ portion of their overall allocation due to the historically low default rate compared to similarly rated corporate bonds and provide a stable and reliable stream of income that is tax-advantaged,” Lanouette continued. 

The market is “trading a little rich from a spread perspective,” he said. The past 12 months were a record for issuance – about $580 billion. “Surprisingly, the market has absorbed that relatively well,” Lanouette said. 

Last year, issuance increased sharply in some areas, for instance for public schools. A January 6 report (Bloomberg) noted that US public schools borrowed heavily in 2025, the sector’s largest year for municipal debt sales in more than a decade as dipping enrollment and elevated inflation strained districts’ budgets. School systems around the US issued about $82 billion in muni bonds in 2025, surging almost 42 per cent on a year earlier and the highest since 2013. The report said that growth pace beat the broader tax-exempt debt market, which saw issuance climb about 15 per cent to a historic high of nearly $568 billion.

On December 24 last year in Morningstar.com columnist Dan Lefkowitz noted that muni bonds may have not had a banner year, but it was far from poor: “Tax-exempt bonds have staged a comeback in the year’s second half. Since July 1, the Morningstar US Municipal Bond Index has outpaced its taxable equivalent. For muni-bond investors, the year is shaping up to be disappointing but far from disastrous.”

Given the background, CIBC has increased duration from short to neutral versus the muni index over the last six months.

Issuance increase
Lanouette reflected on why municipalities have increased issuance. 

The rise happened because Covid-related funds provided by the federal government to municipalities during the pandemic were exhausted. That drawdown of such funds brought municipalities back to the market. New projects costs also rose due to higher inflation, he said. 

“With that backdrop I’d expect municipal bonds to be a little more attractive to Treasuries, but that is not the case [yet],” Lanouette said.

It’s all about the ratio 
One key to understanding how munis are valued is a ratio. The muni-to-Treasury (M/T) ratio compares tax-exempt municipal bond yields to taxable US Treasury yields to determine relative value, usually calculated as "AAA Muni Yield"/"Treasury Yield." A higher ratio (such as more than 85 per cent) means munis are cheap (better value), while a lower ratio (such as less than 65 per cent) suggests that they are expensive.

Expressed as a ratio, municipal bonds in the one- to 10-year part of the curve trade at between 63 per cent and 68 per cent of US Treasuries, roughly in line with averages over the last five years but below the 80 per cent experienced over a longer timeframe. 

With ratios, Lanouette said, the key level is 59.2 per cent which is the one minus the top tax rate. If a municipal bond yield is 59.2 per cent of a US Treasury there is no added tax benefit so an investor would be indifferent between a municipal bond and US Treasury. 

A point for investors to remember is that municipalities, unlike the federal government, must balance their budgets every year. Another difference is that munis tend, on balance, to be less liquid than Treasuries and there are wider bid/offer spreads on pricing. 

Such debt carries tax exemptions: Interest earned is generally free from federal income tax. Also, residents usually don't pay state or local income tax on bonds issued by their own state. In secondary markets, capital gains are taxed.

There are different broad muni bond categories: “general obligation bonds” and revenue bonds. General obligation bonds are issued by stable municipalities and are backed by tax revenues from a large state/city. These are mostly funded via property taxes and are highly stable. “Most people have their taxes and mortgages in one payment. General obligation bonds are an extremely stable revenue stream,” Lanouette said.

When analyzing such debt issuers, some of Lanouette’s time is spent looking at the different demographics of states, to see which ones are losing/gaining population, percentage of the population above or below the poverty line, and breakdown of residential versus commercial property taxpayers as these factors all affect property tax revenues.

In the case of revenue bonds, these are backed by specific sources of revenue and they are used for “essential” and “non-essential” services. The former tend to be in areas such as water, sewerage, and transportation, while the second type are for entities such as sports facilities. The latter tend to be riskier.

With pressures remaining on municipalities to build and replenish infrastructure, and little immediate chance of a Fed rate hike – this is an election year, remember – the backdrop for muni debt may not be stellar, but the asset class appears to be worth a closer look for wealth management portfolio bosses.