Are municipal bonds underutilized in client portfolios? Coming up, we take a closer look at this sometimes misunderstood investment.

From Thrivent Asset Management, welcome to Advisor’s Market360®, a podcast for you, the driven financial advisor.

Municipal bonds are most often characterized as a tool for diversification and providing tax benefits in a portfolio. But because of their tax advantages, municipal bonds are often underappreciated in terms of investment performance. So, what role should municipal bonds, or as they are often called, munis, play in your clients’ portfolios?

To answer this question and many others, we have invited two municipal bond experts to join us. They are Johan Åkesson, Senior Portfolio Manager and Stephanie Woeppel, Senior Portfolio Manager. They are co-managers of Thrivent Municipal Bond Fund and Thrivent High Income Municipal Bond Fund.

Let's get into it…

To start, let’s get a broad definition of municipal bonds. Here’s Woeppel.

Woeppel: So municipal bonds are a fixed income asset class that provides financing to public and not-for-profit entities throughout the United States. What makes these investments attractive is that they are typically issued tax exempt, which means that the buyer of the bond will not pay federal and sometimes not state tax on the income of the holding. When you buy a municipal bond, you're typically investing in things like cities, states, counties, hospitals, higher education institutions, core infrastructure projects like airports, things like new terminals, runways and even airlines can borrow in the municipal bond space for specific projects.

Host: Åkesson had this to add about the main categories of municipal bonds…

Åkesson: I would say the two big categories of munis would be, revenue bonds and general obligation bonds.

Host: A quick definition: General obligation bonds are backed by the issuer's full taxing power and general funds, making them lower risk. Revenue bonds are repaid solely from revenues of a specific project such as tolls or utility fees and carry higher project-specific risk but often higher yields. Now that we have a basic understanding of municipal bonds, we wanted to know what type of investor might find them attractive. Here’s Woeppel, followed by Åkesson:

Woeppel: So, what makes municipal bonds attractive is a couple of things. One. Attractive yields. Two is that it does offer diversification in any investment strategy. It has issuers that are unique from any other asset class — 50,000 issuers within the municipal asset class. And it's really appropriate for investors who have some level of tax sensitivity where they can benefit from the tax exempt income that municipals provide.

Åkesson: I would add that it enables an investor to invest in sectors that are completely different from what you would see anywhere else. We invest in charter schools. We invest in local hospitals, school districts, airports and toll roads. A lot of sectors you would never, as an investor, be able to find anywhere else.

Host: Diversification is one role of municipal bonds. The other, of course, is performance. We asked Åkesson about municipal bond performance in 2025:

Åkesson: So, 2025, turned out to be a pretty volatile year in the muni markets. Like the fixed income markets in general. Some of the volatility were very specific to munis, though. And it happened in the first half of the year. One thing that came about pretty quick was that there was talk about some munis possibly becoming taxable. That was not a good one for the muni market. So when we get to the second half of the year, you know, it became clear that there would not be any taxation of the municipal securities, no additional and no changes. So that was a good thing for the market that helped to boost munis in the second half. We still have the tariffs. Turned out that they did not have that inflationary pressure on the economy in general. That was also beneficial to the market. So, we did see a good rally across the whole yield curve for the second half. The muni market still did not get back to the same levels we saw in the beginning of the year.

Host: Looking at 2026, we asked Åkesson about the impact of a new Federal Reserve chair who will replace Jerome Powell in May…

Åkesson: The candidates we've seen mentioned here recently seem to be accepted by the market, financial markets, and that's very important. You never know what might pop up. It's definitely something we keep an eye on. So that could be something that moves the markets here in the next couple of quarters.

Host: And we also asked Åkesson about the mid-term elections coming up in November…

Åkesson: Another area that we are keeping an eye on for the second half of the year are the midterm elections. They do tend to have an impact on the muni market, too. One thing is they do create volatility in financial markets with the different proposals that we see. Some of them might be in regards to future spending. The bond market does not like to see big spending proposals in the out years. We don't like big budget deficits. There could also be other proposals that might affect specific muni sectors, too. So, we're definitely keeping an eye on what's popping up here in the politics later in the year.

Host: As we all know, the Federal Reserve, or Fed, sets interest rates. We wanted to get a better understanding of how movement in interest rates affect municipal bonds. Again, here’s Åkesson:

Åkesson: Well, you always have, some volatility in the interest rates. Although some years, like last year, you see a lot bigger moves. So, it's not the typical year what we saw last year. Both funds we have here are long municipal bond funds, which means we are on the longer end of yield curve. It also means that we are very sensitive to changes in long term interest rates.

Host: We asked Åkesson to go a little deeper on the yield curve…

Åkesson: So, so one thing to look at is the steepness of the municipal yield curve. Currently, you know, between if you look at 30- to 10-year. So, a 10-year part of the curve compared to a 30-year part of the curve, it's currently 154 basis points. A year ago that was 84 basis points. So you're getting an additional, you know, 70 basis points, by going out to the long end of the yield curve compared to a year ago. That's a lot of extra yield. And to us, that is an opportunity to get into a long fund where you capture that extra yield, especially compared to a year ago. And even if you go back further, more than a year ago, that's a lot of extra yield you're getting right now. A few years ago, you were getting 2%. It's a lot different right now.

Host: As mentioned earlier, municipal bonds can offer tax benefits especially for those in higher tax brackets. This benefit is most often stated as “tax equivalent yield.” For municipal bonds, this yield is the return a taxable investment would need to generate to equal the tax-exempt return of the municipal bond. It is used to compare "apples to apples" when evaluating tax-exempt versus taxable investment options. When considering two Bloomberg indexes, Woeppel provided some current equivalent yields:

Woeppel: The Bloomberg Municipal Bond Index is currently yielding about 3.5% on a tax equivalent basis. At the top tax bracket, that's a 5.86% return. And at the 32% bracket, it's still above corporate and Treasury alternatives at about 5.1%. So, the high yield 3565 index is currently yielding 4.19% on a tax equivalent basis at the highest tax bracket. That's well north of 7%.

Host: AI has been in the headline for the past two years. We asked Åkesson how AI has affected the municipal bond market…

Åkesson: The way it affects munis, one thing would be the explosion of data centers you see across the U.S. They need a lot of the infrastructure to be put up. So, we're seeing deals that will provide the infrastructure around the roads, water system. Another big part there is that they do need a lot of energy, too. It has turned out that the fastest and quickest way to provide energy is to use gas. So, you see a lot of gas prepayment bond deals that will provide gas for 10 years. They can lock in the cost of the gas for the energy for these plants. So, that's something we see. And that will also probably provide a lot of issuances here in the next year or the in a few years, too. If it continues to expand the way it is.

Host: Investing in individual municipal bonds is challenging. For most investors, an easier way to add municipal bonds to portfolios is via a municipal bond fund. Thrivent offers two such funds: Thrivent Municipal Bond Fund which is an investment grade fund and Thrivent High Income Municipal Bond Fund which invests in lower grade securities. First, let’s hear more about Thrivent Municipal Bond Fund. Here’s Åkesson:

Åkesson: The investment grade fund would invest in securities, you know, to, to a large extent, I would say roughly 95% of a portfolio would be triple B and higher. And specifically, you know, maybe 45% are triple B’s and single A's. And, then we would have some double A's and a lot of issuance of double A's in the municipal market. So, you do end up buying that too. And a much smaller share of triple A's. We don't really need to buy triple A. They don't provide a ton of yield. So, we prefer to buy a little bit lower than that. There might be a sprinkle of securities that are below investment grade in the investment grade portfolio. But you're talking about maybe 3 or 4%. And then we do have a few that are non-rated, but they could be investment grade, too, or they could be a double B.

Host: We turned to Woeppel to hear more about the Thrivent High Income Municipal Bond Fund:

Woeppel: The high yield fund will invest approximately 40 to 60% of its assets in true high yield or non-rated bonds. A big portion of the high yield market is actually issued non-rated, which highlights the need for high quality research. And the other 40 to 60% of the fund will actually be invested in investment-grade bonds. And this is different from a corporate fund, where a high yield corporate fund might be 95, 100% high yield. A municipal fund needs a pretty significant portion of high quality bonds because the high yield investment space can be somewhat illiquid, given the vast, unique, broad blend of issuers and small issuers that dominate that space. So, we maintain a big portion of high quality bonds for liquidity purposes to meet fund flows. And that's pretty typical across the high yield space.

Host: We also wanted to hear about the investment process for these two funds. Åkesson explained the process:

Åkesson: The investment process we have here at Thrivent on the municipal bond side is fundamental at its core. We do a lot of hands-on research on every credit we look at buying, and we look up lots of credits every week. Most of them do not make it. So, when we do decide to buy something, we feel we're really taking a close look at that credit. We have a very experienced research team here. Everyone's done this for decades. And it takes that, especially when you're looking at high-yield type credits. The risks can be very specific to each credit and different. It's nothing for amateurs. You need to have experience and seen a lot.

Host: What sets municipal bonds apart from other investments is their duration. Some of the durations are very long. This can inject “duration risk” into the calculation. We asked Åkesson to give us his take on duration risk:

Åkesson: Duration risk. You are going to have it with the long, long muni funds. You can in theory hedge it a little bit, by using futures, shorts on Treasury futures. Problem there is that munis and Treasuries don't move together over time. And that's what happened here last year when munis cheapen up a lot more and if you had used short term Treasuries, it would have done nothing, really. So, with long term, municipal bond funds, as an investor, you do need to have a longer term perspective, I believe. Because you are going to have years or quarters when the market's back up and you're going to have good ones too when it rallies. But if you are a long-term investor, you should be able to ride out these moves in the markets.

Host: Before we go, Åkesson added one more thought about the special nature of municipal bonds and their role within communities…

Åkesson: It also helps to build up the country by investing in these types of sectors, providing financing for these type of credits. It makes you feel good. It is a nice investment.

Host: We hope you enjoyed this overview of municipal bond investing. We would like to thank Johan Åkesson and Stephanie Woeppel for their insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360 and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now.

All information and representations herein are as of 1/12/2026, unless otherwise noted.

Past performance is not necessarily indicative of future results.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

This podcast is not intended as a source for tax, legal or accounting advice. Your client should consult with a legal and/or tax professional regarding their individual situation. The Funds discussed may invest in municipal securities that are subject to state and local taxes and/or the alternative minimum tax (AMT). While the dividends earned on a municipal bond funds are usually federally tax-exempt, any capital gains distributions, as well as realized capital gains from selling fund shares, may be taxable.

Woeppel discussed two Bloomberg indexes.  The Bloomberg Municipal Bond Index is a market value-weighted index of investment grade municipal bonds with maturities of one year or more. The Bloomberg 65% High Grade/35% High Yield Bond Index represents the US municipal bond market. 65% is investment grade municipal bonds with maturities of one year or more. 35% is noninvestment grade or unrated bonds.

There are risks involved when investing in municipal securities. Municipal bonds may be affected by political or economic conditions at the state, regional or federal level. Debt securities are subject to risks such as declining prices during periods of rising interest rates and credit risk, or the risk that an issuer may not pay its debt. High yield securities are subject to increased credit risk as well as liquidity risk. The use of futures contracts involves additional risks such as a loss in value in the underlying instrument, which could decrease the Fund’s value.

Investing involves risks, including the possible loss of principal. The prospectus and summary prospectus contain more complete information on the investment objectives, risks, charges and expenses of the fund, and other information, which investors should read and consider carefully before investing. Prospectuses and summary prospectuses are available at thiventfunds.com.

Thrivent Distributors, LLC, a registered broker-dealer and member FINRA, is the distributor for Thrivent Mutual Funds. Asset management services are provided by Thrivent Asset Management, LLC, an SEC-registered investment adviser. Thrivent Distributors, LLC, and Thrivent Asset Management, LLC are subsidiaries of Thrivent, the marketing name for Thrivent Financial for Lutherans.