Thornburg Municipal Bond Funds Q4 2025 Commentary

Why It Matters

The outlook signals continued demand for tax‑free municipal bonds, offering investors higher real yields amid a favorable fiscal backdrop. Thornburg's strategic tilt could set a benchmark for asset‑allocation decisions in the muni space.

Key Takeaways

• Fed rate cuts lift municipal bond prices.
• AAA muni curve flattening splits short and long yields.
• Thornburg favors 10‑30 year high‑quality, longer duration.
• Housing and hospital issuers show strongest performance.
• Fiscal health monitoring focuses on tax revenue trends.

Pulse Analysis

The broader fixed‑income landscape entered 2026 with the Federal Reserve easing policy, trimming rates after a year of inflationary pressure. Those moves not only buoyed Treasury yields but also reverberated through the municipal market, where tax‑free bonds became more attractive relative to taxable alternatives. Investors are now chasing real yields that outpace inflation, and the steepening of the 10‑30 year muni curve has created a sweet spot for longer‑dated securities that deliver higher after‑tax returns.

Thornburg Investment Management has leveraged this environment by emphasizing a longer‑duration, high‑quality bias in its municipal portfolios. By targeting the 10‑30 year segment, the firm aims to capture the steep yield curve while maintaining credit discipline. Bottom‑up research highlights housing and hospital issuers as particularly resilient, delivering outperformance as state and local governments continue to fund essential services. This sector focus, combined with a preference for AAA‑rated issues, positions Thornburg to benefit from both yield enhancement and lower default risk.

Nevertheless, the firm remains vigilant about fiscal headwinds. Unexpected drops in tax revenues or adverse budget revisions could erode state balance sheets, threatening muni credit quality. Thornburg monitors these indicators closely, weighing them against the robust reserve positions many states hold. As 2026 unfolds, the interplay between fiscal health, rate trajectories, and investor appetite for tax‑free income will shape the municipal market, and Thornburg's disciplined stance offers a template for navigating these dynamics.

Thornburg Municipal Bond Funds Q4 2025 Commentary

Thornburg Investment Management · Feb 10 2026 11:15 PM ET

Summary

• U.S. fixed‑income markets concluded 2025 on a positive note, with broad gains driven by Federal Reserve rate cuts, cooling inflation, and resilient economic data.

• Unemployment reached a four‑year high of 4.6 % in November amid layoff announcements from major companies including Meta, Target, Amazon, Molson Coors, and Applied Materials.

• The Thornburg Municipal portfolios posted mixed total returns during the quarter as the AAA Muni curve flattened, with shorter maturities rising while longer maturities fell.

• Thornburg managers remain constructive on municipal fundamentals heading into 2026, as fiscal positions remain healthy underpinned by solid state revenues and elevated reserves.

• The robust credit outlook and steep yield curve present opportunities for investors to secure attractive, tax‑free yields on high‑quality municipal bonds heading into 2026.

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Market Review

U.S. fixed‑income markets concluded 2025 on a positive note, with broad gains driven by Federal Reserve rate cuts, cooling inflation, and broadly resilient economic data despite challenges like the U.S. government shutdown and labor‑market softness. The Federal

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Quick Insights

How is Thornburg positioning its municipal bond portfolios for 2026?

We maintain a longer duration and higher‑quality bias, capitalizing on attractive real yields and a steep yield curve, particularly in the 10‑30‑year segment.

What are the key risks Thornburg is monitoring in the municipal market?

We closely watch for early signs of fiscal weakness, such as unexpected tax‑revenue drops or negative budget revisions, despite currently healthy state reserves and pension funding.

What sector and maturity dynamics are influencing Thornburg's security selection?

Our bottom‑up research favors resilient issuers, with notable outperformance in housing and hospital‑sector bonds, and we see value in longer maturities as curve steepening persists.