Municipal bonds have financed American infrastructure for over two centuries. These debt securities remain a cornerstone of fixed income investing, offering tax advantages and relative stability that continue to attract investors today.
New York City issued the first official municipal bond in 1812 to finance a canal project. This pioneering debt instrument was a general obligation bond, backed by the city's taxing power and tax revenues.
The Erie Canal project, completed between 1817 and 1825, required 42 separate bond issues. This early success demonstrated how municipal bonds could fund large infrastructure projects that benefited entire communities.
By 1843, total municipal debt sat at about $25 million. Over the next two decades, this total increased exponentially as cities financed urban improvements and free public education systems.
The market faced its first major crisis following the Panic of 1873. Excessive investment in railroads and real estate led to widespread defaults. Many state and local governments failed to meet their obligations, temporarily halting municipal financing.
Congress introduced a permanent federal income tax in 1913. The Revenue Act specifically excluded municipal bond income from federal taxation. This tax exemption became the defining feature that shapes the municipal market today.
Municipal bonds have provided critical financing for infrastructure projects throughout American history. Today, two out of three infrastructure projects in the U.S. are financed through municipal bonds.
State and local governments issue these bonds to pay for large capital projects: roads, bridges, airports, schools, hospitals, water treatment facilities, power plants, and courthouses. Borrowing allows governments to spread costs across multiple generations. Future project users bear some of the cost through higher taxes or tolls, fares, and other charges that help service the debts.
The municipal debt market is relatively small compared to the corporate market. Total municipal debt outstanding was $4 trillion as of the first quarter of 2021, compared to nearly $15 trillion in the corporate and foreign markets. However, the number of municipal bond issuers far exceeds the number of corporate bond issuers.
Since 1913, the federal income tax has exempted interest payments received from municipal bonds from taxable income. State and local governments also typically exempt interest on bonds issued by taxpayers' state of residence.
This tax exemption allows state and local governments to borrow more cheaply than other debt issuers, such as corporations, for a given level of risk and length of maturity.
The tax benefit is especially valuable for investors in higher tax brackets. Consider the tax-equivalent yield calculation. As of late 2024, the yield on the Bloomberg Municipal Bond Index was approximately 3.6%. For an investor in the top tax bracket of 37% plus the 3.8% Net Investment Income Tax, that 3.6% yield equals roughly a 6.1% taxable yield.
Even for investors in lower tax brackets, municipal bonds remain attractive. That same 3.6% yield equals a 4.7% taxable yield for someone in the 24% tax bracket.
Municipal bonds offer these tax advantages while typically carrying investment grade credit ratings. Most municipal bonds are held by households, followed by mutual funds. Banks and life insurance companies were once more prominent municipal bond holders, but tax law changes in 1986 limited the tax benefits for these institutional investors.
Historical default rates have been lower in the municipal sector than in the corporate market. During the Great Depression, from 1929 to 1937, 30% of industrial bonds defaulted while only 7% of municipals did. Of the 4,700 municipalities that defaulted in those years, nearly all made good on their debts by the 1940s.
This strong credit profile stems partly from the fact that many municipals are backed by state and local government power to tax or revenue from public utilities.
Approximately 97% of AAA credits and 94% of AA credits maintained their S&P ratings from 1986 through 2024. This stability reflects the essential nature of the services municipal bonds finance and the political imperative to honor debt obligations.
Municipal issuers operate under a different mandate than corporate borrowers. Rather than maximizing shareholder value, they aim to provide the highest level of government service at the lowest possible tax rate. Municipal issuers are far more likely to access federal funds, lean on other entities, or receive support from neighboring municipalities when facing crisis. The decision to default on debt service is rarely made strategically, only out of necessity.
The municipal bond market has experienced significant activity in recent years. After below-average new issuance in 2022 and 2023, due to leftover pandemic stimulus and a better-than-expected economic recovery, municipal issuers returned to market in 2024.
New issue supply in 2024 reached almost $500 billion, setting a record. Through the first half of 2025, issuance continued at elevated levels, eclipsing the prior year's pace.
State and local tax collections continued to beat expectations in 2025, growing 4.5% year over year in the second quarter. Revenue projections for fiscal 2026 were 2.8% higher than those for fiscal 2025, signaling a potential fourth consecutive year of modest revenue growth.
State rainy day funds reached historically strong levels. In 2019, the median state rainy day fund was 14% of a state's total spending. By fiscal year 2024, that figure had surged to 28%. This fiscal cushion positions states and local governments well to weather potential economic slowdowns.
Municipal bond yields reached attractive levels in 2024 and 2025. As of late 2025, 20-year AAA municipal bonds yielded approximately 3.85%, which was 120 basis points higher than the 10-year average of 2.65%.
The municipal yield curve is steep, rewarding investors with additional yield for extending maturity. Municipal bonds remain one of the few sectors of the fixed income market that generously compensate investors to extend duration.
Demand for municipal bonds remained healthy. Municipal bond funds experienced over $42 billion in inflows during 2024, with most of those inflows to ETFs and investment grade munis. This strong demand continued into 2025.
One Oak Capital Management, LLC has built its investment strategy around the unique opportunities in the municipal bond market. Founded in 2013 as a New York based Registered Investment Adviser, One Oak employs institutionally oriented investment strategies to provide investors with differentiated approaches to meet absolute return or high tax-free income objectives.
The firm's approach captures value opportunities in the investment grade municipal and corporate bond markets, integrated with a disciplined portfolio risk management framework.
One Oak Capital Management offers several separately managed account strategies focused on municipal bonds. The Enhanced Municipal Portfolio is a laddered, actively managed strategy that capitalizes on the idiosyncratic nature of the municipal market. The approach consists of a diversified portfolio of high credit quality bonds designed for investors seeking tax-advantaged income.
This strategy earned Zephyr's PSN Top Gun award for having a Top 10 return for the three-year and five-year periods ending September 30, 2025, in the PSN Municipal Universe. The portfolio also received a five-star Morningstar Rating. (Disclaimer: References made to awards/rankings are not an endorsement by any third party to invest with One Oak and are not indicative of future performance. Investors should not rely on awards/rankings for any purpose and should conduct their own review prior to investing. Zephyr/PSN is an asset and wealth management software marketed by Informa (LSE: INF). PSN is a database of Separately Managed Accounts managed by Zephyr. One Oak does not compensate Zephyr for inclusion in the PSN database, nor does it compensate Zephyr for consideration for, or awarding of, the PSN Top Gun designation. The Morningstar Rating for Funds, often called the Star Rating, is a data-driven rating that measures the past performance of a fund in comparison to peers. One Oak has purchased the Morningstar Basics Package, which grants One Oak the permission to feature its Morningstar Rating in marketing materials. This purchase, renewed on an annual basis, has a value of $6,885.06)
One Oak Capital Management also offers an Enhanced Taxable Municipal Portfolio that capitalizes on the idiosyncratic nature of the municipal market supplemented with exposure to corporate bonds. The portfolio consists of diverse, high credit quality bonds that seek a combination of attractive taxable income and total return.
The firm's investment team brings deep expertise in fixed income markets. Neil Crabb, Senior Portfolio Manager, has 34 years of industry experience and oversees the firm's municipal research process and trading systems. He leads the firm in driving the strategic bond initiative and identifying opportunities for new product offerings.
Joseph H. Marren, Head of Research and Portfolio Manager, oversees the firm's research strategy across all sectors and asset classes. He brings 49 years of industry experience, including 23 years in senior roles leading business development within the M&A departments of Citigroup, Credit Suisse, and other major financial institutions.
Municipal bonds have weathered almost every economic storm, providing much-needed capital stimulus during some of the deepest U.S. recessions. The asset class combines essential public purpose with attractive investment characteristics.
The tax exemption on municipal bond interest remains intact. Recent Congressional budget bills confirmed that municipal bond interest will remain tax exempt, providing clarity for investors and issuers alike.
Your personal financial goals determine whether municipal bonds fit your portfolio. The tax benefits increase with your marginal tax rate. The credit quality appeals to investors seeking stability. The income stream supports those who need regular cash flow.
Municipal bonds finance the infrastructure you use every day: the roads you drive, the water you drink, the schools that educate your community. These bonds connect your investment dollars to tangible public benefits while potentially reducing your tax burden.
The market size, at $4 trillion outstanding, provides liquidity for investors. The diversity of issuers allows for portfolio customization based on your state residence, risk tolerance, and income needs.
One Oak Capital Management continues to emphasize municipal bonds because the fundamental value proposition remains compelling. High credit quality, tax-advantaged income, and opportunities to add value through active management combine to create an attractive investment option.
The current environment offers particularly strong opportunities. Yields stand at levels not seen in many years. State and local government finances remain healthy. The steep yield curve rewards investors who extend duration. These factors position municipal bonds favorably for investors seeking income and capital preservation.
The firm also offers an Enhanced Short-Duration Municipal Portfolio designed for investors seeking low volatility and attractive tax-advantaged yields. Additionally, for qualified clients seeking absolute return strategies, One Oak provides a Municipal Opportunities Fund that identifies relative value opportunities uncorrelated to traditional fixed income.
Municipal bonds have evolved significantly since that first New York City canal bond in 1812. The market has grown more sophisticated, regulation has increased, and disclosure has improved. Yet the core appeal endures: financing essential public infrastructure while providing investors with tax-advantaged, relatively stable returns.
Whether you are a high-net-worth individual seeking tax efficiency, a retiree needing steady income, or an institution managing a diversified portfolio, municipal bonds deserve your consideration. The combination of over 200 years of market history, current attractive yields, and strong credit fundamentals makes a compelling case for including municipal bonds in your fixed income allocation.
For more information about how One Oak Capital Management can help you access the municipal bond market through customized separately managed accounts, visit their website or contact their team to discuss your investment objectives.
