This report provides a detailed analysis of the municipal bond market's performance and key trends during the third quarter of 2025, with a specific focus on the Franklin Intermediate Municipal SMA Composite's strategy and outlook.
Navigating the Evolving Landscape of Municipal Bonds
Municipal Bond Market Dynamics in Q3 2025
During the third quarter of 2025, the municipal bond market experienced a notable increase in new bond offerings. This surge surpassed the average levels observed in previous years, largely driven by a substantial 34% year-over-year rise in issuance during July. By the close of the quarter, this heightened activity underscored a dynamic period for municipal financing.
Franklin Intermediate Municipal SMA Composite's Performance
The Franklin Intermediate Municipal SMA Composite demonstrated strong performance, exceeding the returns of its designated benchmark, the Bloomberg Managed Money Intermediate Index, over the quarter. This outperformance highlighted the effectiveness of its investment strategy in capitalizing on prevailing market conditions.
Impact of Credit Ratings on Portfolio Results
A significant factor contributing to the positive results for the period was the strategic overweight allocation to AAA-rated municipal bonds. Conversely, an underweight position in AA-rated municipal bonds also played a role in shaping the composite's overall performance, indicating a discerning approach to credit risk management.
Shifts in the Municipal Bond Yield Curve
The municipal bond yield curve continued its steepening trend throughout the quarter. This development led to a slight cheapening of valuations for longer-maturity bonds, presenting new opportunities and challenges for investors as the market adjusted to evolving interest rate expectations and supply-demand dynamics.
Attractive Valuations and Income Potential
Despite the various market shifts, municipal bond valuations consistently appeared attractive. This was particularly true when considering their tax-adjusted basis, which continued to offer compelling income opportunities for investors seeking tax-efficient returns in a steady market environment.
