It may be a good time to get into municipal bonds. The assets had a rough go heading into last week’s election and tumbled immediately afterward, sending yields higher. Bond prices and yields have an inverse relationship, which means as prices decline, yields rise. However, prices rallied sharply on Friday, a day after the Federal Reserve’s expected rate cut . “While munis have partially recovered some losses, year-to-date performance is still lagging, and yields are still elevated,” Sudip Mukherjee, fixed income strategist at UBS Global Wealth Management, said in a note Monday. “Investors should take advantage as munis are poised to deliver good performance into year-end and 2025, in our view,” he added. Interest income from municipal bonds is free of federal income taxes. Further, if the investor resides in the same state that issues the bond, the interest income can be exempt from state taxes. That makes them particularly attractive to people who are in the highest tax brackets. Yields had moved higher ahead of the election partly because issuers were bringing supply into the market before the vote. That “blistering pace” has since cooled, although issuance may pick up before the end of the year, Mukherjee wrote. “We expect 2025 will be another year of strong issuance fueled by continued pent-up infrastructure capex needs and bond ballot initiatives,” he said. “Nevertheless, the combination of attractive yields, strong credit quality, and our expectation of lower Treasury yields bodes well for muni performance over the next year from a total return perspective.” Bank of America is also expecting a multi-month rally from here to the first quarter of 2025. That’s because the market should be driven by the Federal Reserve ‘s interpretation of the economy and the path of its rate cuts, said Yingchen Li, the bank’s municipal research strategist. “Both muni rates and muni/Treasury ratios should decline,” he said in a note Friday. “Current levels for all investment grade munis are good entries for new long positions.” By the second half of next year, potential policies from the Trump administration may have an impact on the economy, Li wrote. The Republicans hold the majority in the Senate , and the party retained control of the House with 218 seats versus Democrats’ 208. A GOP sweep could make it smoother sailing for any policy changes. “While there is a good degree of uncertainty at this point, our take is that investors may need to expect slightly stronger economic growth and a relatively shallower Fed rate cut cycle,” Li said. Assessing policy shifts Taxes are expected to be a top agenda once President-elect Donald Trump takes office, with provisions in the Tax Cuts and Jobs Act set to expire at the end of 2025. One of those provisions is the $10,000 cap on state and local tax, or SALT, deductions. During the campaign, Trump said he would ” get SALT back ,” suggesting he would eliminate or increase the cap. In addition, he has proposed cutting corporate taxes to as low as 15% for certain companies. Both of those tax cuts could reduce muni bond demand, Li said. However, other policies, such as energy, trade, immigration and deregulation, may also impact the municipal bond market and its issuers, he said. As for any potential changes in the individual tax rate, UBS’ Mukherjee doesn’t necessarily see a big impact on demand. “The breakeven tax rate (at which the tax equivalent yield on investment grade munis equals the yield on investment grade corporate bonds) is currently at around 30%, significantly lower than the maximum marginal rate of 40.8% (including a Net Investment Income Tax of 3.8%),” he noted. “This suggests that even if top tax rates were lowered, there is significant headroom for munis, with respect to their comparative appeal.” Of course, the scope and timing of policy shifts makes forecasting difficult, Bank of America’s Li said. “Nevertheless, we continue to view muni credit overall as fundamentally strong and muni market issuers are well positioned to handle the policy shifts that eventually will come,” he wrote. “While some sectors are more exposed than others, we expect credit to remain stable in 2025 as the economy continues to grow, and again anticipate that muni upgrades will outpace downgrades next year.”